If you happen to be 62 or older, a reverse mortgages is a way to borrow against the equity in your home to provide what may be tax-free income. Generally, a reverse mortgage requires no scheduled loan payments until the loan ends. However, there are some downsides which may affect your decision to pursue a reverse mortgage.
Reverse mortgages are almost always more complicated than conventional mortgages, and the consequences of various plans and options may not always be clear. Here, if you decide to pursue a reverse mortgage, asking a lot of questions and insuring that you understand what could be relatively complex terms will be important to avoid unwanted future consequences.
Though the benefits of a reverse mortgage may be attractive, they are typically more expensive compared to other loans, including home equity loans, especially at the time the loan is initiated. To make the best decision, be sure to consider all so called “up-front” and future costs and factor those costs into your budget and decision making process.
Although the money you receive with a reverse mortgage is typically income tax-free, a reverse mortgage may affect your eligibility for “needs-based” public assistance benefits. Examples of benefits that may be impacted include Supplemental Security income, otherwise known as “SSI” and Medicaid/MediCal. If tax or needs-based benefits are a concern to you, consulting with an experienced tax attorney would be a great start to understanding the tax and needs-based benefits consequences of a reverse mortgage.
Though it may seem obvious, a reverse mortgage is likely to reduce or eliminate the equity in your home. Here, reducing the or eliminating equity in your home will likely affect the estate to be distributed to your heirs.
Here’s an example of how a reverse mortgage can get tricky and when a detailed understanding of the terms of a reverse mortgage will be important. When a mortgage product is something other than an FHA-insured mortgage, it is important to confirm the reverse mortgage is entirely a “non-recourse” loan. This means the liability to repay the loan is limited to your home (its then market value) and would not subject any of your other assets or income, or the income and assets of your heirs, as sources for repayment.
Finally, reverse mortgages are often not well understood by real estate, mortgage, tax, or even legal professionals. Before working with anyone on a reverse mortgage product, be sure to research their experience with reverse mortgages before accepting their advice. This can include online research, contacting references, and asking questions.
