Reverse-Mortgage-Truth.com

This is a continuation of yesterday’s post on your reverse mortgage and tax consequences.

If you (like most seniors), choose not to pay the interest that accrues on the reverse mortgage, the tax deduction is deferred until a later date. How much does that cost in income taxes? Probably not much. To give you an idea, multiply your tax rate by the total interest deduction that you took last year.

For example:
Income Tax Rate: 15%
Mortgage Interest Paid: $5000
15% of $5000 = Total Cash Savings: $750
Divided by 12 months = monthly savings $62.50

Based upon this example, the total monthly cash savings from the interest deduction is $62.50. This is a pittance when compared to the benefit of receiving payments instead of making them. But if you need that interest deduction in any given year, you can always make payments on your reverse mortgage. Financially astute clients of ours have used this fact to their tremendous advantage.

As mentioned above, if you do not make any payments, you don't actually LOSE the interest deduction - you just save it for later. Whether or not you have an existing mortgage to eliminate, the interest deduction is deferred until the reverse mortgage is paid off. If you were to sell the house or get a big inheritance, then you could use that deduction to offset your capital gains or inheritance tax. Or the interest deduction passes to your estate so your heirs pay less in taxes. To find out how much interest would accrue over time on a reverse mortgage, ask your lender or reverse mortgage counselor for an amortization table.

If the tax ramifications are a big concern for you, please contact a tax expert.

You may believe that you should only borrow money when you know that you can repay it soon. Many people like to pay off their entire credit card balance every month. But isn't taking out a reverse mortgage just borrowing money that you cannot repay or, even worse, borrowing 'against' your home?

When you borrow, you are receiving money that is not yours to keep forever and that you must pay back at some future date. You only borrow when you know that you will be able to earn the money to repay the loan in the future. If not, you're "counting your chickens before they hatch".

While such principles can serve us well, they do not apply to the reverse mortgage. Why is that? First, you are only receiving money that is already yours. Your home equity is exactly that – yours – it is just tied up in your home and inaccessible without a mortgage. You're not counting your chickens before they hatch. You're hatching the nest egg that you already have – your home equity.

Second, when you borrow money, you are required to start paying it back immediately. What happens if you cannot afford to make your mortgage payments? The bank forecloses and takes your home. That is why you only want to borrow against your home when you are sure that you will have enough money to pay it back. Anything else would be crazy, right?

But with the reverse mortgage, no monthly payments are required for as long as you live in the home. Since there are no monthly payments to make, you do not have to worry about losing your home for missing them. You do not repay any money for as long as you choose to live there. Even better, the reverse mortgage is "non-recourse", which means you do not personally owe any money. The home, not you, stands for the debt. In the unlikely event that the mortgage balance exceeds the home value, the FHA insurance will make up the difference, not you or your heirs.

In summary, the reverse mortgage is not really borrowing money 'against' your home. It is simply accessing money that is already yours through a safe, secure government-regulated program.