Reverse mortgages have become a popular option for senior homeowners looking to increase cash flow without invading their retirement assets in the face of rising costs. Originating from the Housing and Community Development Act of 1987, the Federal Housing Administration (FHA) insures reverse mortgages, which are designed to assist elderly homeowners facing economic hardships. While not as popular as they once were, data shows that over 49,000 homeowners took out FHA-insured reverse mortgages in 2021.
To understand how reverse mortgages work, homeowners borrow against the equity in their homes, receiving a lump sum, monthly payments, or a combination of both. Typically limited to a percentage of home equity, the maximum limit for home equity conversion mortgages in 2023 was $1,089,300. To qualify, homeowners must be at least 62, have no outstanding federal debt, and demonstrate enough equity and cash on hand to cover expenses like real estate taxes and maintenance. While there are no restrictions on the use of funds with the most common type of reverse mortgage, homeowners may be required to pay off any existing mortgage.
One downside to reverse mortgages is the potential for high fees, financial counseling, and closing costs. These expenses can eat into the equity in the home, leaving homeowners with less available cash in the long run. Homeowners should also consider potential property tax increases in high-tax states like California, Florida, New York, Texas, and Colorado when taking out a reverse mortgage. Unfortunately, scams involving reverse mortgages still exist, with scammers targeting vulnerable seniors with inflated assessments and high fees.
Reverse mortgage payments are not taxable for federal income tax purposes, but interest that accrues is not deductible until the loan is repaid. Inheritance and estate taxes may be affected by a reverse mortgage, as the value of the home secured by a loan is reduced by the loan’s value. For seniors receiving Supplemental Security Income or Medicaid benefits, increasing their bank balance with a reverse mortgage could impact their eligibility for benefits. Interest rates on reverse mortgages are typically adjustable, making the total borrowed amount unpredictable over time.
Overall, reverse mortgages can be a viable option for some homeowners but may not be suitable for everyone. It is crucial for homeowners to educate themselves about the costs, consequences, and potential drawbacks of reverse mortgages before moving forward. Trusted advisors can provide guidance and assistance in making an informed decision about whether a reverse mortgage is the right choice.
