Welcome to “Ask Stacy,” a short video feature answering money questions submitted by readers and viewers. You can learn how to send in a question of your own below.
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Today’s question is about reverse mortgages; specifically, how the new tax law affects them.
Reverse mortgages are a heavily advertised solution to a common problem for seniors of having a lot of home equity but not enough cash flow. If you’ve ever wondered whether a reverse mortgage is for you, here’s your answer.
For more information on this topic, check out “Before You Get a Reverse Mortgage, Check Out These 15 Alternatives” and “Ask Stacy: Should I Take Out a Reverse Mortgage?” You can also go to the search at the top of this page, put in the words “reverse mortgage” and find more information.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, it’s time for your money Q&A question of the day.
I’m your host, Stacy Johnson, and this question is brought to you Money Talks News, the best in personal finance news and advice since 1991.
Our question today comes from Barbara. Barbara says, “With the changes in the tax laws, I’ve read that a home equity loan is really not as advantageous as it used to be. What about a reverse mortgage? Did the tax law changes affect those?”
Before we begin, let’s make sure that everyone understands what a reverse mortgage is.
A reverse mortgage is simply a mortgage: You’re borrowing against your house. The difference with a reverse mortgage is that although you’re taking out a loan with your house as collateral, instead of making payments every month, you receive payments every month or get a lump sum of cash.
Since you’re not making payments on the loan, the interest stacks up and the mortgage gets bigger and bigger. You pay off the entire mortgage when you leave the house. If the mortgage has grown to become more than the house is worth, that’s the bank’s problem. (Which is why your reverse mortgage amount will never be close to the value of your house — the lender has to be sure there will be enough equity when the time comes to pay both the loan and the accrued interest when the home is ultimately sold.) But if your kids want your house, they’ll have to pay off the loan.
To qualify for a reverse mortgage, you must be at least 62.
Now, back to Barbara’s questions. Here are a couple of things she needs to know.
First, reverse mortgages are considered home equity loans and, thanks to the new tax law, the interest on most home equity loans is no longer deductible. Now, does that really affect your reverse mortgage? For most people, not really. Remember, I told you the interest is kind of stacking up on top of the mortgage and it’s only paid when the house is sold or the mortgage is otherwise paid off. So, you could miss that deduction, but at that point, it probably won’t matter much.
Other than that, there’s really no change in reverse mortgages, at least that I’m aware of.
My final point on this topic: Be really careful when you go into a reverse mortgage. You’re required by law to get counseling from a certified reverse mortgage counselor before you take out a reverse mortgage, and I would encourage you to do that if you’re even thinking about getting one. Counseling is cheap: around $100. So, get that counseling. You’re going to have to get it anyway, so you might as well get it before you begin the process.
You’ve probably seen a lot of commercials for reverse mortgages on TV. There’s a reason for that. These lenders are making lots of money, because the fees are high. That doesn’t necessarily mean reverse mortgages aren’t a good idea. But it’s something I want you to be aware of, so look before you leap.
Does that make sense, Barbara? I hope it answered your question.
And now we’re going to close with our quote for the day. This one comes from Oprah Winfrey:
“Everyone wants to ride with you in the limo, but what you want is someone who will take the bus with you when the limo breaks down.”
Well said, Oprah.
Hey, guys, hope you have a profitable day. Meet me right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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