In the last fifteen years or so, television viewers, especially those watching late at night, have been inundated with commercials for reverse mortgages. A reverse mortgage allows a mortgagor, 62 or older, to continue living and retain title in the home; while receiving back his or her equity in the form of a monthly cash payment. The original home owner continues to pay for property insurance, taxes, and maintenance. If a home owner moves, sells, or dies, he or she (or his or her estate) must repay the loan.
Any loan balance to be repaid would include the original cash payment, interest and fees, the latter two of which are added to the loan balance on a monthly basis. Thus, the total debt increases as interest accrues while the home owner receives this monthly payment of loan funds. Often, it is the estate of the mortgagor that will repay the loan; at least, this is what usually is intended.
The following are the three types of reverse mortgages:
- Home Equity Conversion Mortgages (HECMs), which are federally insured reverse mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
- proprietary reverse mortgages, which are reverse mortgages offered and backed by the same developing entity; and
- single-purpose reverse mortgages, offered by some state and local government agencies, as well as nonprofit organizations. This is the least expensive option.
One considerable advantage of a reverse mortgage is that the cash payments are considered loan advances, thus, they do not constitute income earned, and, most importantly, are not taxable. Also, a reverse mortgage does not affect the receipt of any Social Security or Medicare benefits, although it may affect Medicaid.
A disadvantage of a reverse mortgage is that all of the interest that accrues on the reverse mortgage is not deductible by until actually paid, which is typically when the loan is paid in full. Also, a mortgage interest deduction is subject to the same limits as other home equity loans and interest may only be deductible on a loan up to $100,000 and no more.
If you have or are contemplating a reverse mortgage and have any tax-related questions, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
