Life Events

A reverse mortgage lets homeowners who are old enough convert part of their home equity into cash without selling the house or making monthly mortgage payments. It can help some retirees, but it is a costly loan with long-term consequences, so careful study is important.

How it works

Instead of you paying the lender, the lender pays you, and the loan balance grows over time as interest and fees are added. The loan generally becomes due when the last borrower dies, sells the home or permanently moves out. The most common type is the federally insured Home Equity Conversion Mortgage (HECM), available to homeowners at or above a minimum age who live in the home as their main residence.

How you can receive the money

• A lump sum.
• Monthly payments for a set period or as long as you live in the home.
• A line of credit you draw on when needed.
• A combination.

Possible benefits

• Supplemental income, with no monthly mortgage payment required.
• You keep title to your home.
• HECM loans are generally non-recourse, which means you or your heirs would not owe more than the home's value when it is sold.
• Proceeds are generally not treated as taxable income, because the money is loan proceeds.

Costs and drawbacks

• Origination fees, mortgage insurance premiums, closing costs and servicing fees can be significant.
• Interest accumulates, so equity declines over time and less is left for heirs.
• You must continue paying property taxes, homeowners insurance and maintenance. Failure can put the loan in default.
• Proceeds may affect eligibility for needs-based benefits such as Medicaid and Supplemental Security Income, so check first.
• A spouse who is not a borrower may face problems if the borrower dies or leaves the home.
• Moving to assisted living or a nursing facility for an extended time can trigger repayment.

Tax points

Interest on a reverse mortgage is generally not deductible until it is actually paid, which is usually when the loan is repaid, and deductibility may be limited. Proceeds generally do not reduce your Social Security or Medicare benefits, but you should confirm. Medicare information is at medicare.gov.

Before you decide

1. Compare alternatives, such as downsizing, a home equity line of credit or help from family.
2. Complete the counseling required for HECM loans, which is provided by an approved counselor.
3. Talk with your family about your plans.
4. Shop several lenders and compare total costs.
5. Be wary of anyone who pressures you or ties the loan to buying a product such as an annuity.

The Consumer Financial Protection Bureau has a guide at consumerfinance.gov. To see how a reverse mortgage would fit your retirement and tax picture, contact our office.