Homeowners looking for ways to increase cash flow without tapping into retirement assets may turn to reverse mortgages. These mortgages, created by federal law, allow homeowners aged 62 and older to borrow against the equity in their homes. The borrowed funds can be taken as a lump sum, monthly payments, or a combination of both. The amount that can be borrowed is typically limited to a percentage of home equity, which was up to $1,089,300 for home equity conversion mortgages (HECM) in 2023.
To qualify for a reverse mortgage, homeowners must meet certain criteria, including being at least 62 years old, owning and using their home as a primary residence, and having sufficient equity in the home. While the funds received through a reverse mortgage can be used for any purpose, homeowners are still responsible for paying real estate taxes and maintenance costs. Upon moving, selling the home, reaching a term of years, or passing away, the loan will come due with interest, and the lender may take control of the home.
Reverse mortgages have had a bad reputation in the past due to scams that took advantage of seniors, resulting in huge fees and high costs. While regulations have been tightened to prevent abuse, homeowners should still be cautious when considering a reverse mortgage. Scams may involve promising to help avoid foreclosure or convincing homeowners that their homes have more equity than they do. In one recent case, a Chicago businessman pleaded guilty to a fraud charge related to a home repair and reverse mortgage scam that defrauded elderly homeowners of approximately $6 million.
Reverse mortgage payments are not taxable for federal income tax purposes, and interest on the loan is not deductible until it is paid. However, heirs may be responsible for repaying the loan upon the homeowner’s death if the home’s value exceeds the loan amount. Additionally, receiving a lump sum or other payout from a reverse mortgage may impact eligibility for means-tested benefits such as Supplemental Security Income (SSI) or Medicaid.
Interest rates on reverse mortgages are typically adjustable, with the majority of FHA-endorsed mortgages being adjustable-rate mortgages. The interest rates can fluctuate with the market, potentially impacting the amount that can be borrowed against home equity. While reverse mortgages can benefit some homeowners, they are not the solution for everyone, and homeowners should carefully consider the costs and consequences before moving forward with a reverse mortgage. Trusted advisors and housing counseling agencies can provide guidance and assistance in making an informed decision.
