Many retirees have insufficient financial resources to keep up with inflation and the ever-increasing costs of medical care. What options do these seniors have, especially if they have a mortgage on their home and their retirement income is too low to cover their mortgage payments with enough left over for some enjoyment in their golden years, without relying on help from family?
Not a day goes by that we don’t see ads on television for “reverse mortgages,” which allow homeowners to borrow against the equity they have built up in their home over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the homeowner’s heirs can pay off the debt by selling the house, and any remaining equity goes to them. If the loan balance at that time is equal to or more than the value of the home, the repayment amount is limited to the home’s worth.
In order to be eligible for this loan, the borrower must be at least 62 years of age and have equity in the home. The reverse mortgage must be a first trust deed. Thus, any existing loans would have to be paid off with separate funds or with the proceeds from the reverse mortgage. The amount that can be borrowed is based on age: the older the borrower, the greater amount that can be borrowed and the lower the interest rate. The loan amount will also depend on the value of the home, interest rates, and the amount of equity built up.
The borrower has the option of taking the loan as a lump sum, a line of credit, or fixed monthly payments. In addition, the money can generally be used for any purpose, without restrictions imposed.
One question that always comes up when discussing reverse mortgages is, when will the interest be deductible? Consider the following factors when determining whether reverse mortgage interest is deductible, when it is deductible, and by whom:
- Interest (regardless of type) is not deductible until paid. A reverse mortgage loan is not required to be repaid as long as the borrower lives in the home. Therefore, the interest on a reverse mortgage is not deductible by anyone until the loan is paid off.
- Generally, reverse mortgages are classified as equity loans, and the deductible interest would be limited to the interest accrued on the first $100,000 of debt. There are exceptions for when the reverse mortgage is used to pay off an existing acquisition debt loan. Also, equity debt interest is not deductible by taxpayers who are subject to the alternative minimum tax (AMT).
So, who deducts the interest when the loan is paid off?
Debtor: If the debtor pays off the loan while still living, the debtor is the one who deducts the sum of the interest he or she would have been entitled to deduct each year had it been paid, subject to the limitations discussed in 1 & 2 above.
Estate: If the estate pays off the mortgage after the debtor has passed away, the estate would deduct the interest on its income tax return. The deductible amount would be the sum that the interest the debtor would have been entitled to deduct each year had he or she paid it, subject to the limitations discussed in 1 & 2 above.
Beneficiary: If the beneficiaries who inherit the home pay off the mortgage, the interest would be deductible as an itemized deduction on their personal 1040 income tax returns. The amount deductible would be the sum of the interest the debtor would have been entitled to deduct each year had he or she paid it, subject to the limitations discussed in 1 & 2 above.
Reverse mortgages have brought financial security to many seniors so that they can live a comfortable life. If you are a senior who is struggling with your finances, carefully explore your options, including the possibility of a reverse mortgage. Keep in mind, however, that some reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high, especially if you don’t plan to be in your home for a long time or only need to borrow a small amount.
Before taking out a reverse mortgage, you should carefully consider all of your options, such as selling the home, taking out a conventional mortgage, taking in room renters, and renting out the home while living elsewhere. This may also be something you will want to discuss with family members. If you need assistance or have questions about reverse mortgages, contact the Experts at Henssler Financial: