If you’ve seen the TV ads for reverse mortgages, you may be wondering exactly how they work and whether they’re actually as good as the ads make them sound. Here we’ll take a look at the answers to some of your questions.
How Does It Work?
A reverse mortgage is essentially just what it sounds like – instead of making a loan payment to your lender, they make payments to you. This money comes out of the equity in your home, and is not “free” money as it might sound.
What Are the Costs?
You aren’t just getting your own money back at no charge. There is typically an origination fee, plus closing costs, and service fees over the term of the agreement. In addition, you will be charged interest. As time goes on, the amount you owe back increases due to these interest charges.
How Are Taxes Affected?
While the payments you receive from reverse mortgages are usually tax-free, the interest you’re paying is not tax deductible until you pay the loan back.
What Happens if I Move or Pass Away?
Because this money is essentially a loan, if you sell your home or pass away you or your survivors will have to repay the loan, even if that means selling the home in order to raise the money.
As you can see, reverse mortgages aren’t quite as attractive as depicted on TV. They are basically loans, and are treated as such, interest and all.