Many seniors expect to sell their house after they retire and pocket some untaxed cash. (Taxpayers don’t owe tax on up to $250,000 of gains on the sale of a principal residence, up to $500,000 for married couples.) However, a slow housing market has hurt the ability of many seniors to tap their home equity in this manner.
Increasingly, reverse mortgages are becoming a substitute solution. More than 73,000 reverse mortgages were originated last year, according to the Department of Housing and Urban Development. That’s about 12 times the number of reverse mortgage originations in 2000. The Federal Housing Administration expects the number of reverse mortgages to reach 128,000 by 2017.
Why are reverse mortgages increasingly popular? They allow homeowners to tap home equity even if they can’t sell their home. With a reverse mortgage, a homeowner (usually 62 or older) borrows against the equity in the home and receives regular payments. Those payments are tax-free, just as the proceeds from any type of loan are not subject to income tax.
Although a reverse mortgage is a loan, you are not required to repay anything until you sell or vacate the home. You must remain current on your tax and insurance payments, though. When a reverse mortgage borrower sells the house or dies, the lender will be repaid, plus interest. Typically, repayment will come from the sales proceeds.
Reverse mortgages have upfront costs, paid by the borrower. Therefore, borrowers should intend to stay in the house for a while, after getting a reverse mortgage, to justify paying the initial charges.