Reverse mortgages are complicated financial instruments that have a lot of moving parts. As such, it is important for consumers to know some of the most critical components of Home Equity Conversion Mortgages (HECMs), including when the loan requires repayment, as well as the potential tax advantages associated with reverse mortgages, according to a recent article from Forbes.
In one of his latest reverse mortgage articles, Wade Pfau of The American College and McLean Asset Management, highlights what consumers need to know about repaying a reverse mortgage. This includes knowing that reverse mortgage payments, though not required, may still be made at the borrower’s discretion.
“Repayment of a home equity loan balance may be deferred until the last borrower or non-borrowing spouse has died, moved, or sold the home,” Pfau writes. “Prior to that time, repayments can be made voluntarily at any point to help reduce future interest due and to allow for a larger line of credit to grow for subsequent use. There is no penalty for early repayment.”
As prospective reverse mortgage borrowers become familiar with repayment rules, it is also important to know about the non-recourse aspect of HECMs, which prevent borrowers or their estate from having to pay back more than their home’s worth, even if the loan balance exceeds this appraised value.
“In these circumstances, the borrower (or estate) can grant a ‘deed in lieu’ and walk away from the obligation of selling the home,” Pfau writes. “Alternatively, if the borrower (or estate) can sell the home for more than the loan balance, then they keep the difference.”
Another important aspect of HECMs that many people may not know is the tax implications of getting a reverse mortgage, and the possible benefits they might produce.
For one, reverse mortgage loan proceeds are not subject to income taxes and do not impact a borrower’s Medicare premiums or the taxation of Social Security benefits, Pfau notes, however, they may affect eligibility for Medicaid and other welfare benefits.
When it comes to possible tax deductions, that is where things get complicated for reverse mortgages, as Pfau notes this may require delving into complicated and uncommon areas of the tax code.
“The accumulated interest in the loan balance may be deductible, which could provide a large tax deduction for heirs,” he writes. “This deduction would apply to interest accumulated through the variable LIBOR rate and lender’s margin components of the effective rate, but not the mortgage insurance premiums.”
The interest deduction may be capped at $100,000, Pfau notes, unless proceeds from the reverse mortgage were used to acquire, build or substantially improve the primary residence.
“Either the HECM for Purchase program or using an HECM to pay off an existing mortgage may provide exceptions which could allow the full interest due to be deducted,” he writes. “There may also be some special cases in which mortgage insurance premiums could also be deductible at the time of loan repayment.”
Read the Forbes article.
Written by Jason Oliva
