Reverse Mortgage Loan Features And Cautions
Reverse mortgages have some very attractive features, especially if you are trying to get the most out of limited retirement income. Since this type of mortgage is a loan advance they are not taxable and normally will not effect your Medicare or Social Security benefits. The homeowner retains title to the home and will not have to make monthly payments. This really helps stretch your retirement cash.
When the homeowner sells the home, it is no longer the primary residence or when the last surviving borrower dies, the loan must be repaid. With a HECM program, the borrower can live in a medical facility or nursing home for up to 12 months before requiring that the loan be repaid. This provides a margin of comfort and safety for surviving children or other care givers.
As with any mortgage program directed to seniors, there are things to be aware of.
- Since interest is charged each month and added to the outstanding loan balance, the amount you owe on a reverse mortgage will grow over time.
- Most reverse mortgages have variable rates that are tied to a financial index and change on a monthly or annual basis. Fixed rate reverse mortgages are available but do not provide as much cash access as the variable rate loans.
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- A reverse mortgage uses up all or a significant portion of your home equity. This will result in less for your heirs or your possible future needs. Most reverse mortgages contain a “nonrecourse” clause which states that you or your heirs will not be responsible for paying back more than the value of the home when the loan is repaid.
- You retain title to your home and will continue to be responsible for property taxes and the normal upkeep expenses related to your home such as insurance, utilities, and maintenance. Your loan may become due and payable if you default on your property taxes. Some taxing districts provide for a senior waiver to defer property taxes until your home is sold. Check with you area taxing authority to see if this is available in your area.
- Since you are not paying the interest on a reverse mortgage but simply letting it accrue, it is not deductible on your income tax return. When the loan is paid off or your home is sold it will be deductible.
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Before taking out a reverse mortgage to help with your retirement income, you should consult with your children and/or an advisor other than the mortgage company to make certain this is the right thing for you to do.
