A home-equity conversion mortgage, also called a reverse mortgage, lets homeowners age 62 or older borrow against some of their home equity. You can use the money for just about any reason, including a major home renovation, healthcare costs or to supplement retirement income.
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The major benefit of a reverse mortgage is that it doesn’t have to be repaid during your lifetime. As long as you maintain the home and pay the insurance and property taxes, you can live there with no payments due.
How a Reverse Mortgage Depletes Generational Wealth
The balance on a reverse mortgage increases over time due to accrued interest, mortgage insurance premiums and service fees. It becomes due when you die, sell the home or move out for 12 months or longer. Assuming you intend to pass the home down, one of two things will happen:
- Your heirs will have to repay the loan in full, even if the balance exceeds the home’s value, in order to keep the home.
- They’ll sell the home to repay the loan — or 95% of it if the balance exceeds the home’s value.
Repaying the loan during your lifetime can keep the home available to your heirs and potentially preserve more generational wealth.
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How To Pay Off Your Reverse Mortgage
Using cash savings is the easiest and cheapest way to pay off your reverse mortgage, but it’s not your own option.
Refinance the Loan
If you can afford to make monthly payments on a home loan, consider refinancing your reverse mortgage with a cash-out refinance loan. Your heirs might be able to simply assume the loan when the home passes to them. If they want or have to sell, they can still come out ahead because they won’t have to contend with years of unpaid interest and fees on the entire original principal amount.
Cash In Investments
Reverse mortgage loans typically have higher rates and fees than other types of home loans. If the rate on your loan is higher than the returns you’re getting on investments in a standard brokerage account, selling off some of the portfolio could eliminate the debt and increase the wealth you pass to your heirs.
Proceeds from the sale of investments don’t count toward Social Security earning limits. However, you might have to pay capital gains tax on the profit, and your personal income tax can be impacted, as well.
Dip Into Retirement Accounts
Inherited annuities, pensions, 401(k) plans and individual retirement accounts are all subject to capital gains tax when they pass to your heirs. The gains are calculated based on your cost, not the assets’ value, when they pass down.
That’s not the case with real estate, so using your retirement accounts to protect the home could have tax benefits for your heirs. But again, liquidating the assets could subject you to capital gains tax and impact your personal income tax liability.
Let Your Heirs Pay Off the Loan
If your main reason for wanting to repay the reverse mortgage is that it’s your heirs’ preference rather than your own, consider asking them to repay the loan as a condition to inheriting the property unencumbered by a lien.
That strategy could be a win-win. It would allow you to continue to benefit from the loan proceeds. And it would reduce the interest and fees your heirs would pay, and perhaps even save them from the cost of financing the purchase with their own loan after you pass.
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This article originally appeared on GOBankingRates.com: Boomers: Your Reverse Mortgage Depletes Generational Wealth — Here’s How To Pay It Off
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