A reverse mortgage is a special type of home loan designed to enable homeowners 62 years of age and older to access part of the equity in their homes. It's called a "reverse mortgage" because, instead of you paying the lender, the lender pays you. These payments can be a lump sum, a monthly advance, a line of credit, or a combination.
There are three basic types of reverse mortgages:
When you take out a reverse mortgage, the title to your home remains with you and you continue to live in the home. You must continue to pay for repairs, property insurance, and taxes. When you move out, sell the home, or die (or the last surviving borrower dies), you or your estate will need to repay the loan.
The loan balance will include the amount paid to you in cash, plus the interest and fees added to the loan balance each month. This means your total debt increases as the loan funds are paid to you and interest on the loan accrues. Usually, when the loan become due, you or your heirs will have to sell the home and use the proceeds to pay it off. You or your heirs can keep any money left over. If you or your heirs want to retain ownership of the home, you usually must repay the loan in full—even if the loan balance is greater than the value of the home. (Learn about reverse mortgage restrictions and requirements.)
As far as taxes go, there are pros and cons to reverse mortgages.
On the plus side, reverse mortgages are considered loan advances to you, not income you earned. Thus, the payments you receive are not taxable. Moreover, they usually don’t affect your Social Security or Medicare benefits.
On the down side, all the interest that accrues on your reverse mortgage is not deductible by you until you actually pay it, which is usually when you pay off the loan in full. Moreover, your mortgage interest deduction is usually subject to the same limits as other home equity loans—that is, you can deduct the interest on no more than a loan of $100,000.
A reverse mortgage may or may not be your best option. Here are some factors to keep in mind:
Do your homework before taking out a reverse mortgage. See the Nolo article Reverse Mortgage Scams, for advice on heading off problems. For more information about reverse mortgages, visit the website of the Consumer Financial Protection Bureau (search for "reverse mortgage") and AARP's useful articles on reverse mortgages.