Who benefits from a reverse mortgage are senior borrowers with high equity in their homes and a need for more income each month. Banks also benefit because they make good profits on these loans.
- Payments are structure assuming you will stay in your home until you are 100 years old.
- The monthly payments are tax-deductible, but there are tax considerations to think about.
- Banks make money in three ways from these loans.
- There are alternatives to a reverse mortgage.
You may benefit from this type of loan, but you have many other options. Take time to think about your alternatives and which best suits your situation.
How Long Can You Stay in Your Home with a Reverse Mortgage?
How long you can live in your house depends on a few factors. The first is whether you receive a lump sum or monthly payment. With a lump sum, you can only borrow up to 60% of your home’s value, so you still have equity. As long as you pay all your bills you can stay in the home. When you opt for a monthly payment plan banks assume you will live to 100 years old. So, you can stay in your home until you:
- Live to 100 years old (if you have a monthly payment plan)
- Move into a long-term care facility
- Sell your house
- Pass away
Beyond those limits, how long you stay depends on if you can keep up with your bills and maintenance on the property. The bank can foreclose if you aren’t current on taxes, insurance, and other obligations associated with the house. They can also foreclose if your property falls into disrepair.
Who Benefits from a Reverse Mortgage: Tax Deductions
Some expenses are tax-deductible. It is essentially a home equity loan for tax purposes. That means:
- The payments, whether lump sum or monthly are not income, so they are not taxed.
- It doesn’t impact taxes on social security payments.
- It doesn’t affect Income-related premium surcharges for Medicare Parts B and D.
- Interest on the first $100,000 is tax-deductible if you cash out the equity and use the money to pay expenses. People who pay Alternative Minimum Tax (AMT) lose this deduction.
- Interest for the first $1 million is tax-deductible if you use the money to refinance your loan or pay for repairs or improvements.
- The Mortgage Insurance Premium (MIP) is tax-deductible for acquisition but not for cash-out-equity cases.
- The borrower continues to pay property taxes, and in most cases, they are deductible.
Another aspect of taxes is that interest accrues and compounds because borrowers don’t pay it continuously. So, the interest is claimed all at once at the end. Therefore, you risk losing part or all the deduction if the debt exceeds the adjusted purchase price or you don’t have enough income to offset the deduction.
The reason this type of loan is taxed this way is that you are borrowing against the equity in your home. You already own the capital, so it can’t be income. Therefore, proceeds from the loan aren’t taxable.
Tax issues get complex with these loans. If you have questions about what is taxable or not, you should contact a certified public accountant (CPA) for help.1
Social Security and Medicare
Social security and Medicare are not means-tested. Proceeds aren’t dependent on how much income or assets you have. Further, as we discussed earlier, the IRS doesn’t consider the money you get from a reverse mortgage as income anyway.
Medicaid and Supplemental Security Income
Medicaid and Supplemental Security Income (SSI) are means-tested. Your benefits are based on your current assets. If you have a line of credit, it won’t impact you if you don’t use it, but lump sum and monthly payouts may impact your benefits with these programs. You should consult an estate planning or elder law attorney before you get one if this concerns you.2
Who Benefits from a Reverse Mortgage: Banks
Banks make money on reverse mortgages in three ways.3
- Interest – The borrower accrues interest over the life of the loan and pays it at the end.
- Origination fees – Banks may charge a percentage of the loan amount or home value. It can’t be more than $6,000.
- Secondary Market – Lenders sell loans at a premium to recoup capital.
Can You Negotiate?
Absolutely, you can negotiate the terms. Banks make a lot of money on these, and there are many banks offering them.
- Negotiate interest rates just like you do with any other mortgage.
- Negotiate fees, especially the origination fee. Many times, banks will reduce or waive these.
Don’t be afraid to shop around and compare plans. This is a competitive and profitable industry, and banks have room to negotiate.4
Can You Have Two Reverse Mortgages?
You can only have one reverse mortgage on your house at one time. You can refinance after you’ve had the loan for at least 18 months, but HUD must approve the new loan. If you pay off your mortgage, you can get another one.5
What is Better Than a Reverse Mortgage?
Reverse mortgages generally help seniors with a lot of equity in their homes but not much cash. If you aren’t over 62 and have a lot of equity in your house, you won’t even be able to get one. Here are some alternatives:
- Refinance an existing mortgage – If your credit is good then you will get a better interest rate
- Take out a home equity loan – This gives you a lump sum.
- Get a home equity line of credit – This gives you a line of credit that you can draw on as you need it.
- Sell your house to your children – They can act as the bank and provide the funds that you need monthly and then recoup their costs when they sell the house.
- Downsize – Move into a more affordable home and not take on more debt.
We believe that it is best to always minimize and eliminate debt whenever possible. So we recommend the last option as the best if you find yourself in a situation where you own your home but can’t afford the bills each month.6
Final Thoughts About Who Benefits from a Reverse Mortgage
Who benefits from a reverse mortgage? Borrowers who are over 62, have a lot of equity in their property, and who don’t have enough money to pay all their bills each month may benefit. If your credit is good, then other loans usually have better terms, but other loans don’t generate a stream of income.
Banks certainly benefit. They make money in several different ways. They make money on the interest rate, the fees, and in the secondary market. For a bank, these loans are very secure because the house is collateral, and the loan is insured by the Federal Housing Authority.
Debt is hardly ever good, especially for seniors. Think about other options before you get one. Meet with a HUD-approved financial counselor before you make any decision.