Borrowers select home equity conversion mortgages (HECM) or reverse mortgages for various purposes and objectives; many wonder about possible restrictions on the use of those funds. This portion of HSH.com's reverse mortgage guide addresses how reverse mortgage pay-outs can be used.
Are there restrictions on using HECM or reverse mortgage funds?
There are no restrictions on how you use your HECM funds; you can use them for everything from paying routine expenses to traveling around the world. However, it is a good idea to be as prudent as possible when using up the equity in your home, especially if you are a younger reverse mortgage borrower -- you may need those funds in the future.
Can I use an HECM to buy a home?
Instead of remaining in the same home that they have lived in for some period of time, a borrower might want to use a reverse mortgage to downsize and purchase a new home better suited to their current and future needs. This arrangement is called "HECM for Purchase," and like the traditional use for an HECM, requires no monthly payment.
The advantage of using an HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of cash, which are then combined with the reverse mortgage proceeds. This home buying process leaves you with no monthly mortgage payments.
Can I deduct the interest on my reverse mortgage?
No. The tax code only allows deductions for interest that you actually pay, not interest that is accruing, as it does in an HECM or reverse mortgage. If you do choose to pay some interest off at some point, you would then be able to deduct a portion of that from your taxes.
Other than that, the interest paid on the HECM isn't deductible until the loan is paid off, and will be subject to deductibility limits that are applied to home equity debt (interest on amounts up to $100,000 are fully deductible). Section II of IRS publication 936 details the deductibility of home equity interest. If the loan is paid off after the death of the homeowner, the interest deduction can be taken by whoever repays the loan -- the decedent's estate or heirs.
Understanding reverse mortgage terms
Articles in the "Finances" section of this reverse mortgage guide have addressed HECM borrowing limits, loan limitations, credit rating considerations and more. The last article in this section explains how interest rates are calculated and describes how line of credit variable interest rate loans work.
Next: Reverse mortgage technical stuff
Previous: Reverse mortgage distribution options
- How to Lower Your Property Taxes
No one enjoys paying taxes. What's worse is the idea of overpaying taxes. Implement these tips to reduce your property taxes.
- Buying a Home as an Investment Property
Many of the largest fortunes in America were built on real estate, and buying investment property is still a solid wealth-building strategy. This article covers what you need to know about investing in real estate and how to get financing for an investment property.
- Better to Buy a New or Used Home?
If you can afford to choose between a new home and a previously-occupied one, how will you decide? Learn advantages and disadvantages of both choices.
- 5 Credit Report Errors That Will Cost You
If you plan to apply for credit, take on a new job or purchase insurance in the near future, there's a 20 percent chance your credit report could let you down. Learn how to find and fight credit report errors before they do serious damage to your finances and your life.
- Home price recovery index: Which metros have improved the most, least?
Have home prices in your area fully recovered from the declines suffered during the Great Recession, or are they still struggling to make it back to the peak reached before the crisis?