You likely have seen commercials featuring Tom Selleck and Henry Winkler advocating for reverse mortgages as a valuable income source for retirees or individuals with limited funds. However, while these loans can offer significant benefits, they may not be suitable for everyone. The guide below will take a closer look at the advantages and disadvantages of reverse mortgages and help you determine if they are right for you.
The Pros
There are numerous benefits to a reverse mortgage, including the following:
A Way To Manage Retirement Expenses
As people retire, they often experience a significant decrease in their regular income. This financial challenge can be addressed by considering a reverse mortgage, which offers a way to supplement reduced income without exhausting savings. Additionally, the lack of mandatory monthly payments associated with a reverse mortgage can free up financial resources within the monthly budget.
No Need To Relocate
A reverse mortgage allows homeowners to stay in their homes as they age, providing financial flexibility and security. While there are costs and fees associated with a reverse mortgage, the long-term savings may outweigh the expenses, especially when compared to purchasing a new home or renting in a different location. This allows homeowners to maintain their independence and remain in a familiar environment as they age.
Do Not Pay Taxes on Income
According to the Internal Revenue Service (IRS), funds obtained from a reverse mortgage are categorized as loan advances rather than income. This distinction results in the funds being exempt from taxation, which sets them apart from other forms of retirement income, such as distributions from a 401(k) or IRA, which are typically subject to taxation.
Protected if the Balance is Greater Than the Home’s Value
As the balance of a reverse mortgage grows over time, it becomes possible that the amount owed may eventually exceed the current value of the home. However, because a reverse mortgage is classified as “non-recourse” financing, the debt that must be repaid can never surpass the property’s value. This protection ensures that the lender cannot make any claims against your other assets or those of your heirs, providing a safeguard for your financial security.
The Cons
Although a reverse mortgage may be a great option for many, it is still important to understand some of the disadvantages associated with this process:
There Are Fees
Fees that come with reverse mortgages may include origination fees, closing costs, mortgage insurance premiums, and servicing fees. That is why it is important to carefully review and understand all the associated fees before proceeding with a reverse mortgage.
You Cannot Deduct the Interest Right Away
When paying off your traditional mortgage, you may have taken advantage of the mortgage interest deduction on your taxes. However, with a reverse mortgage, you will not be able to deduct the interest on an annual basis. Instead, you can only enjoy this tax perk when the reverse mortgage is paid off in full.
Other Benefits May Be Impacted
While not typically classified as income for tax purposes, a reverse mortgage can affect your eligibility for other need-based government programs such as Medicaid or Supplemental Security Income (SSI). This is because the funds received from a reverse mortgage could impact your asset and income levels, potentially affecting your eligibility for these programs. Therefore, it is recommended to consult with an experienced advisor or legal professional who can guide you on how a reverse mortgage may affect your eligibility for these critical government programs.
Contact Losavio & DeJean Today
At Losavio & DeJean, LLC, The Louisiana Elder Law Firm, we are dedicated to providing comprehensive legal services tailored to meet the unique needs of our elderly clients. Our mission is to empower and support our clients in living fulfilling lives by ensuring their security and independence well into their golden years. To learn more about reverse mortgages and whether they are right for you, contact Losavio & DeJean today.