The great thing about a reverse mortgage is that you can use it to eliminate your regular monthly mortgage payments.* However, as you may have noticed from our disclaimers, you must also keep up with taxes, insurance, and property maintenance. You’re probably wondering what all of that means, and if so, you’ve come to the right place to learn more without all the legal mumbo jumbo.
Tracking Your Taxes
Many people worry that a reverse mortgage will affect income taxes. Thankfully, because the government considers reverse mortgage payouts as advances instead of income, you won’t have to pay income taxes on the money you receive from a reverse mortgage. It’s income tax-free,** since you are receiving proceeds from a loan based on the equity in your home.
Furthermore, because you don’t need to make monthly payments on a reverse mortgage, you’ll have greater financial freedom to use your money as you wish. A reverse mortgage only comes due when you no longer live in the home, sell the home, or pass away. However, if you choose to receive your reverse mortgage proceeds as a Line of Credit, and make payments before the loan comes due, you would be able to claim interest on the payments you make.
Usually, a typical mortgage will use an escrow service to automatically pay property taxes. Some reverse mortgages may include something akin to an escrow account, known as a Life Expectancy Set Aside (LESA). If a fully-funded LESA is included in your reverse mortgage, the servicer will make payments on your behalf. However, if a LESA is not required or if you have a partially-funded LESA, you will be responsible for paying all property taxes and insurance fees.
Speaking of insurance fees, the Mortgage Insurance Premium (MIP) will be charged at closing based on the amount of money withdrawn during the first year after receiving your reverse mortgage. As long as you withhold from taking more than 60% of the available proceeds within the first year, you’ll only pay 0.5% of the appraised home value. However, taking more than 60% will result in an upfront premium of 2.50%, a whole five times larger than it would otherwise cost.
The MIP is paid to the Federal Housing Administration by the lender and is done in order to guarantee that even if the lending company goes out of business, you will still have access to your funds. Additionally, it guarantees that you won’t need to pay any more than your home’s appraised value at the time the loan comes due. An ongoing MIP is also charged annually, but this fee does not affect your available funds. Instead, it accrues gradually and becomes due and payable along with the rest of the loan. Each annual premium is equivalent to 1.25% of your outstanding loan balance.
Of course, standard hazard insurance is also required. If you live in an area deemed prone to floods, you must also maintain flood insurance. Don’t forget to stay current on this insurance and renew it before it expires. If insurance is not maintained and evidence of current insurance is not provided to your servicer, the loan may become due and payable.
In order to qualify for a reverse mortgage, your home must be in good condition, so if you’ve made it this far, it’s simply a matter of maintaining the status quo. Keep in mind that the lender isn’t concerned with small problems like a bit of peeling paint or a leaky faucet – however, a leaky roof or a crack in the foundation is a serious concern.
The home’s structural integrity is the most important part of property maintenance. Of course, it’s assumed that basic yard work such as mowing the lawn and raking leaves will continue after closing, but perfection isn’t necessary. If you’re concerned about keeping up with property maintenance, it may be a good idea to put aside a bit of the proceeds from your reverse mortgage to cover any surprise expenses you may encounter.
You may be wondering why any of this stuff matters. Under ordinary circumstances, your loan will only come due after all borrowers have passed away, the home has been sold, or the borrower has lived elsewhere for more than six months. But, the loan will also need to be paid if you fail to pay property taxes and insurance or fail to repair the property in the case of damage. As long as proper precautions are taken, you shouldn’t have anything to worry about. Nonetheless, it’s important to understand your responsibilities as a borrower and homeowner.
We hope you’ve found some useful answers to your questions about taxes, insurance, and property maintenance. For more information on reverse mortgages and the loan process, check out our Frequently Asked Questions.
*Homeowner is still responsible for taxes, insurance, and property maintenance.
**Please consult with your financial advisor.