Blog content updated on 11/4/2021
The number of retirees who carry a mortgage balance has grown substantially over the years.
In fact, the 2019 Survey of Consumer Finances by the Federal Reserve found that 37.6% of households headed by people aged 65 to 74 had a mortgage on their primary residence. For those age 75 and older, the number was 27.7%. Compare that to 1989, when those numbers were just 21.7% and 6.3% percent, respectively.
Unfortunately, this means that more and more retirees are dipping into their retirement funds to help make their monthly mortgage payments—which may make it harder for them to pay for current and future living expenses. A 2016 article in USA Today explains why you should pay off your mortgage before you retire—and suggests what to do if you can’t.
How home equity can help.
One option for older adult homeowners to avoid this, and help protect their retirement assets, is to access their home equity. For many, the equity in their homes in the greatest asset they have: in fact, the average amount for homeowners age 65+ is $143,500.1 Today, more financial experts and advisors are recommending that retirees consider accessing this untapped source of funds—and one way to do that is through a reverse mortgage.
Why trade one type of mortgage for another?
Simple: this type of mortgage—a Home Equity Conversion Mortgage, commonly known as a reverse mortgage—doesn’t require monthly mortgage payments.2
When you take out a reverse mortgage, the proceeds are first used to pay off anything that’s left on your existing mortgage, relieving you of the burden of that monthly mortgage payment—and freeing up that money to use for something else. The rest of the reverse mortgage proceeds can be used as you wish for anything from paying living expenses, to helping cover medical costs, to helping family members. It’s up to you.
Of course, the reverse mortgage will have to paid off eventually, as well. But you have the option to pay as much or as little as you wish every month—or skip monthly payments entirely. All you have to do is continue to pay real estate taxes, homeowners insurance, and property maintenance as you do now. The loan isn’t due until the last borrower passes away or leaves the home permanently, and is often covered by the sale of the home.
The incredible shrinking tax break.
You might be tempted to ask, “but won’t I lose the tax break I get from claiming my mortgage interest as a deduction?” The reality is that the more you’ve paid off on your mortgage, the less benefit there is. When you start to make monthly payments in the beginning of the loan, you’re paying mostly interest and very little principal. The amount you can claim on your tax return is high. But as time passes, the script flips, and you’re paying mostly principal—so the tax break is minimal. Plus, now that the standard deduction has been raised, fewer people benefit from itemizing their tax return, which you must do to claim your mortgage interest.
The proceeds from a reverse mortgage are typically income tax-free.3
Here’s another tax-related thing to consider: making withdrawals on your retirement funds can be a double-whammy, as it can trigger more taxes for you to pay, on top of leaving you with less cash for retirement.
The proceeds from a reverse mortgage, on the other hand, aren’t considered income, and therefore aren’t taxable—you’re simply exchanging the equity you’ve already built up in your home for cash to use as you wish.
How much cash you can get?
That depends on a number of factors, such as your age, the interest rate on the loan, the value of your home and how much equity you’ve built up. With today’s historically-low interest rates—and historically-high home values—there actually may not be a better time than now to look into a reverse mortgage to maximize your proceeds.
You can read the full USA Today article about paying off your mortgage here.
Want to learn more about reverse mortgages and get your questions answered? Talk to the experts at Longbridge at 855-523-4326, or fill out the form on this page for a free info kit.
- Joint Center For Housing Studies, 2018.
- Real estate taxes, homeowners insurance, and property maintenance required.
- Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.