LA Times: Why Reverse Mortgages Are a Wealth Management Tool

Loan of last resort: It’s the mantra that long defined the reverse mortgage. But changes to the reverse mortgage program have made the loan more attractive for aging Americans, and are even considered a wealth management tool, according to personal finance columnist Liz Weston.

In a recent Los Angeles Times personal finance Q&A, Weston responds to a reader’s question about whether to take out a second mortgage to pay off the remaining debt in their home and fund necessary renovations. Instead of taking out a $200,000 mortgage, though, Weston advises the reader to consider a reverse mortgage. 

“Although once considered expensive loans of last resort for people who were running out of money in retirement, changes in the federal reverse mortgage program caused financial planners to reassess the no-payment loans as a potential wealth management tool,” she writes. “The idea is that homeowners could tap the reverse mortgage for funds, especially in bad markets, instead of depleting their retirement accounts.”

Advertisement

Still, reverse mortgages are complex products, she notes. 

“You’d be smart to find a savvy, fee-only financial advisor to assess your situation and walk you through your options.”

To read the full Q&A, click here

Written by Emily Study

Join the Conversation (3)

see all

This is a professional community. Please use discretion when posting a comment.

  • The article is interesting in that it declares that reverse mortgages are being used as a potential wealth management tool but fails to describe how. Neither does the author take the opportunity to describe how this so called tool can be utilized to obtain the income tax benefits of mortgage interest deductions which would have been in line with the question asked by the reader. That is a shame since with an adjustable rate HECM there are several advantages over other mortgages including fixed rate HECMs.

    The biggest benefit which is true of all reverse mortgages is that borrowers can pay the interest in one year, once every three years, or longer so as to maximize the value of the related income tax deduction. Thus if the effective marginal income tax rates (federal and states) are low one year and higher in another, all interest can be paid in the year that will have the greatest benefit, i.e., the year when the effective marginal rates are the highest.

    An advantage that all reverse mortgages have over other mortgages is that it is possible for all interest to be paid with no cash out of pocket. All that has to be done is for the reverse mortgage to be refinanced. One, however, must be careful in doing this since upfront costs can be so close to the income tax value of the interest deduction so as to cancel out its value or result in upfront costs exceeding any income tax benefit from the payment of the interest.

    Yet another significant advantage of all reverse mortgages over other mortgages is that borrowers can transfer the income tax deduction of the accrued interest to their estate, trust, and/or heirs simply by not paying the interest during their lifetime as long as the death of the last surviving borrower is the event which triggered maturity causing the reverse mortgage to go into the due and payable status. See Internal Revenue Code Section 691(b)(1).

    One of biggest disadvantages of fixed rate reverse mortgages over adjustable rate HECMs when it comes to the income tax deduction of interest is that all of the cash paid will be lost to the borrower since there is no line of credit with a closed end mortgage (i.e. fixed rate reverse mortgages generally). With adjustable rate HECMs (the most popular form of reverse mortgage), pay downs of any part of the balance due (whether accrued cost or principal) will also increase the line of credit by an equal amount; however, one must be careful with other types of adjustable rate reverse mortgages in that accrued costs may not always increase the line of credit dollar for dollar (or not at all). After the pay down, the cash can be taken back through the line of credit to the extent that proceeds are available but the timing of the payout should be in accordance with the tax plan established with a competent income tax planner.

    Also borrowers with adjustable rate reverse mortgages with available amounts in the line of credit can take the money out of the line of credit to use in paying down the accrued interest to the extent the amount available; however, once again careful planning of how far in advance the money should be taken out should be in conjunction with a tax plan prepared by a competent income tax planner so as to avoid issues over whether the deduction was based on little more than a lender bookkeeping entry.

    Important note: Although Revenue Ruling 1980-248 states that interest on a reverse mortgage can be deducted when paid, that ruling was released before the law on how much of mortgage interest which is paid in a tax year can be deducted as found in Internal Revenue Code Section 163(h)(3). However, the significance of the Revenue Ruling is that it confirms the tax principle that interest deductions are not to be delayed until the mortgage has been paid in full but must be deducted in the tax year paid.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

string(104) "https://reversemortgagedaily.com/2015/01/22/la-times-why-reverse-mortgages-are-a-wealth-management-tool/"

Share your opinion