In recent months, we have seen a growing number of celebrities on TV promoting reverse mortgages. In today’s economy, many retirees are faced with mounting debt and inadequate incomes. For many, their home is their most valuable, and perhaps only, asset, but it is also their home and they really don’t want to sell it.
An option is the “reverse mortgage,” which allows homeowners to borrow against the equity they have built up over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the heirs can pay off the debt by selling the house, and any remaining equity goes to them. If at that time the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home’s worth.
To be eligible for this loan, the borrower must be at least 62 years of age and have equity in the home. The loan amount will depend on factors such as the borrower’s age, the value of the home, interest rates and the amount of equity built up. The borrower has the option of taking the loan as a lump sum, a line of credit or as fixed monthly payments. In addition, the money can be used for any purpose, without restrictions imposed.
Reverse mortgages are considered loan advances and not income, so the amount received is not taxable. The interest accrued on a reverse mortgage is not deductible until it is actually paid, which in most cases is when the loan is fully paid off. The interest deduction may also be limited by the general home mortgage deduction rules.
A reverse mortgage can help provide financial security to many seniors so that they can live a comfortable life. But individuals are cautioned to explore other alternatives as well before entering into a reverse mortgage. It may be a solution for some, but not necessarily a panacea for all. If you are struggling with your finances, carefully explore your options, including the possibility of a reverse mortgage.