Planning for Reverse Mortgages

Due to current inflation rates, some individuals are suffering from cash flow issues. If you are age 62 or older and have substantial equity in your residence, a reverse mortgage may be one way to meet current cash flow needs. A reverse mortgage allows you to receive loan proceeds over a certain period (by borrowing against equity in the home) while continuing to live in the house. Since the loan typically defers all repayment until the house is sold or the borrower dies, lending decisions may be based primarily on your home’s value rather than on your ability to make monthly payments.

To obtain a reverse mortgage, you must own the home outright or be able to pay off any balance with the reverse mortgage proceeds. To avoid default, you must maintain the home, pay property taxes, and provide insurance. Also, married taxpayers should make sure both spouses are listed on the mortgage deed so that any surviving spouse can remain in the home without having to pay off the mortgage.

While a reverse mortgage can help with current cash flow issues, it does not allow a current tax deduction for the interest that accrues on the loan. The interest will not be deductible until the loan is repaid. The repayment (and tax deduction for mortgage interest) generally occurs when you are no longer using the home as your principal residence, you refinance the property, you sell the home, or the home becomes part of your estate. When repaid, the interest is generally considered home equity indebtedness unless used to substantially improve the residence. Since interest on home equity indebtedness is not allowable until 2026 (and then only on $100,000 of indebtedness), you will wish to wait until at least 2026 before making any repayments on the reverse mortgage.