Lenders charge a number of fees to close on and maintain a reverse mortgage. While you don’t have to pay the majority of fees until you leave your home, you could receive less money overall than if you had sold the home outright.
Because a reverse mortgage is a loan, the lender will charge interest on the amount you take out. While you don’t have to pay interest as long as you’re living in the property, this reduces the amount you or your heirs would receive for selling your home.
No Annual Tax Deduction
The interest on a reverse mortgage is not tax deductible. Because you do not make payments on the interest while living in your home, it cannot be deducted every year but will instead accumulate on the mortgage balance. The interest will only be deductible when the reverse mortgage loan is paid off, either partially or fully.
If you live somewhere besides your home, you will eventually need to repay your reverse mortgage. Your loan is due if you live somewhere else for nonmedical reasons for a majority of the year. Additionally, if you move out for medical reasons, such as to assisted living facility, and are out of your home for more than 12 consecutive months, your loan must be repaid. This can force you to pay off the reverse mortgage earlier than expected.
Additional Housing Costs
While you don’t have to make loan payments on a reverse mortgage, you still need to cover other housing costs, including taxes, maintenance and housing association dues. If you fail to make these payments, the lender could foreclose on your home.
However, this concern is not unique to reverse mortgages. If you don’t pay your property taxes, you could eventually lose your home in any situation.
A reverse mortgage could reduce the inheritance for your heirs, as it reduces the equity in your home. If your heirs sell your home after your death, proceeds from the sale of the home will be used to pay off the loan, and then they will receive any remaining proceeds. If they want to keep your property, they will need to pay off the loan first. Usually, there is a 1 year grace period to determine the best options to refinance or sell the property. It’s all about the borrower choosing the best option for their situation and long-term assets plan. We often have clients that decide not to proceed with a reverse loan because they’re worried they won’t leave as much of an inheritance. We also counsel clients to think about discussing with their potential heirs before moving forward.
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