What is a Reverse Mortgage?

You may have heard of a reverse mortgage and wondered what it is. A reverse mortgage has no payment and gives you some of your equity. It’s a choice that some seniors opt for and could be a good option for you.

What Is A Reverse Mortgage?

A reverse mortgage is a special type of mortgage that is for people that are 62 or older and have paid off their mortgage. This type of mortgage is unique in the fact that it allows the owner to borrow part of the home’s equity as tax-free income. In this case, the lender pays the homeowner and the homeowner has no monthly payments. The homeowner does not have to sell his or her home, however, the loan must be repaid when the borrower either dies, permanently moves, or sells the home. Even though the homeowner won’t have any monthly mortgage payments, they will still be responsible for paying property taxes, homeowners insurance, and any costs associated with home upkeep.

As far as the tax implications associated with reverse mortgages go, there are pros and cons. Let’s look at the pros first. Since reverse mortgage applicants have to be 62 or older, it is important to understand that reverse mortgages do not impact Medicare or Social Security benefits. Moreover, since reverse mortgages are considered by the IRS to be loan advances, It does not need to be treated as earned income onyour individual income tax return.

As for the cons associated with the tax implications of reverse mortgages, there are a few. First, interest will accrue on the balance. Like most interest, it is tax-deductible, but not until you actually pay it. That sounds like an obvious statement, but that usually does not happen until the loan is paid off in full. Lastly, there are limits to the amount you can deduct. In the case of reverse mortgages, it is the same as other types of home equity loans—or in other words, you can only deduct interest on loans of $100,000 or less.

How Does A Reverse Mortgage Work?

If you qualify for a reverse mortgage, you may be wondering how it all works. Basically, there is a principal limit which is the amount you can borrow. There are some factors that come into play that determine what this amount is. Factors such as the youngest borrower/eligible non-borrowing spouse, current interest rates, the Home Equity Conversion Mortgage (HECM) limit, and the home’s value all contribute to the principal limit. For example, expensive mansions in Las Vegas with high home values will create a much larger principal limit. If you are older, your property is worth more, and/or you have a lower interest rate, you will likely have a higher principal limit.

Your principal limit might also increase if you have a variable rate. A variable rate gives you more options for payments, such as equal monthly payments, monthly payments for a fixed amount of time, a line of credit, or a combination of a line of credit and monthly payments consistently or for a fixed amount of time. If you have a HECM with a fixed interest rate, you’ll receive a single disbursement, lump-sum payment.

What Are The Requirements For A Reverse Mortgage?

To qualify for a reverse mortgage, there are some requirements you’ll need to meet. First, you have to be 62 or older to qualify for this type of mortgage. You also need to own property or have paid a substantial amount of your mortgage. The property that you own needs to be your primary residence. You can’t have any federal debt, and you will need to be financially capable to continue making payments on property taxes, homeowners insurance, and general home upkeep expenses. Lastly, you’ll have to attend an information session with a United States Department of Housing and Urban Development (HUD) approved reverse mortgage counselor.

What Are The Types Of Reverse Mortgages?

There are three types of reverse mortgages: Home Equity Conversion Mortgage (HECM), Propriety Reverse Mortgage, and Single-Purpose Reverse Mortgage.

HECM: An HECM is the most popular type of reverse mortgage. You’ll get to decide how your money is withdrawn, either through a line of credit, fixed monthly payment, or both at the same time. This mortgage is only offered through Federal Housing Administration-approved lenders.

Propriety Reverse Mortgage: This mortgage is not backed by the government and is a private loan from a private lender. If your home is of a higher value, you might get a larger loan advance with this type.

Single-Purpose Reverse Mortgage: This mortgage is usually given out by nonprofits or state and local government agencies. This loan is the least expensive of the three but can only be used for one specific purpose, such as fixing a part of the home.

What Can You Use A Reverse Mortgage For?

How can you use the money you get from a reverse mortgage? You can use the money as a supplement to retirement income, to repair anything in the house, or to help pay for any medical expenses. It’s a great way to have additional funds if you don’t have the income or savings to cover a certain expense.

A reverse mortgage has its pros and cons, as does anything. You won’t have payments and can enjoy retirement with some extra funds. You’ll also get some choice in how you receive your payments. However, on the other side, you are borrowing against your home and still paying insurance, upkeep fees, and property taxes. There could also be complications with what happens with the home after the homeowner dies and family members inherit it. With any big decision, speak to someone who can help guide you in the right direction. Get in contact with a HUD-approved counselor who can look at your specific situation and walk you through all the pros and cons. They’ll be able to help guide you toward the right decision.