Tax Tip #164

The downside to taking a reverse mortgage:

• Incurring a Large Amount of Interest Debt. Reverse mortgages are rising-debt loans in that the interest is added to the monthly loan balance. Because it is not paid currently, the total interest owed increases greatly over time as the interest compounds.

• Fewer Assets for Heirs. If you want to pass your home to your children or other heirs, the reverse mortgage is not a good choice because the lender could get most of the equity when the home is sold, leaving fewer assets for your heirs.

• High Costs Up Front.

• Adjustable vs. Fixed Interest Rates. Interest Rates are adjustable annually or monthly and tied to a financial index, sometimes with limits on how far the rate can go up or down. Reverse mortgages with interest rates that adjust monthly have no limit.

That being said, if you’re 62 years of age or older, own & live in the home and are house-rich but cash-poor, a reverse mortgage loan allows you to convert part of the equity in your home into cash - without having to sell your home.

Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you.

Borrowers can usually choose to receive monthly payments, a lump sum, a line of credit, or some combination of these.

A reverse mortgage is repaid when you pass away or sell the home.

The proceeds of a reverse mortgage generally are tax-free, and interest on reverse mortgages is not deductible until the debt is paid off.