In Q4 of 2021, homeowners ages 62 and older had a cumulative $11.12 trillion in home equity. If you’re at least 62 and have a significant amount of home equity, a reverse mortgage could help you turn that equity into long-term income.
However, that’s not the only benefit of going with a reverse mortgage. Here’s a look at three advantages of a reverse mortgage that are worth reviewing as part of your decision-making process.
1. It Can Make Retirement More Financially Feasible
Many seniors struggle because they don’t have a reliable source of ongoing income. As a result, some may feel that delaying retirement is their only option.
However, with a reverse mortgage, retirement can be more financially feasible. Money from a reverse mortgage can become a reliable source of monthly income. Essentially, it allows an illiquid asset – your home’s value and equity – to become liquid.
When you opt for monthly payments from the lender, you can use those funds for nearly any purpose, including covering living expenses, investing to build wealth, and more. The only exceptions are typically single-purpose reserve mortgages, which come with restrictions that may limit how the money is used.
2. There’s No Initial Tax Liability
When you get a reverse mortgage, payments from it aren’t treated as income by the IRS or state tax authorities. Instead, the cash is classified as a loan advance. In turn, that makes the money effectively tax-free at the time.
Taxes usually only become part of the equation if you sell the property. At that point, you might owe taxes based on capital gains. However, that isn’t universally the case; whether capital gains are triggered or not depends on the initial purchase price of the property, the value at the time of the sale, and whether your reverse mortgage creates a balance that exceeds the house’s value.
You may also qualify for a limited tax deduction based on interest you paid. However, there are restrictions, as you’re usually only eligible if you use the funds for specific home improvements or other select activities.
3. You Can Stay in Your Home
With a reverse mortgage, you get to remain in your home indefinitely as long as it serves as your primary residence. As a result, regardless of the balance you accrue on your reverse mortgage, forcing you to leave isn’t an option for the reverse mortgage lender. Instead, you’re allowed to remain, regardless of the balance – including if it exceeds your home’s value or available equity amount – as long as you meet the requirements for keeping it as a primary residence.
Additionally, you always have the option of paying off the balance at a time of your choosing. By doing so, the lender no longer has a stake in the property, so you can keep the house regardless of whether it remains your primary residence.
Ultimately, staying in your home is generally an option if you use a reverse mortgage, barring some exceptions. For example, if you live outside of the house (aside from for medical purposes) for six months or more, it may not qualify as a permanent residence any longer. In that case, you may need to repay your reverse mortgage immediately to remain in the house.
