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A reverse mortgage could have benefits for a qualifying borrower, but anyone considering these loans should also be mindful of the potential risks. This is according to nationally syndicated personal finance columnist Liz Weston in one of her latest pieces.
A reader who asked Weston to weigh in on the product relayed the story of their 94-year-old mother, who took out a reverse mortgage in her late 60s thinking she would not live past her 80s.
“Now she needs long-term care and does not have the funds for it,” the reader said. “If she moves out, she is required to sell the home. The capital gains taxes will eat up any remaining equity after that reverse loan is paid.”
Weston responds by characterizing a reverse mortgage as a more ideal option for those who are “house rich and cash poor.” This reinforces what many industry professionals have tried to avoid — namely, labeling the product as a “loan of last resort.”
“The problem is that the debt can grow over time and leave too little equity for late-in-life expenses, such as long-term care,” Weston said. “Of course, many people make the mistake your mother made by underestimating their longevity risk — the chance they’ll live longer than expected and run short of money.”
Instead, they may focus on “maximizing current income” by saving too little, “taking out reverse mortgages too soon or applying early for Social Security without fully considering what these decisions could mean for their future selves,” she added.
Weston ultimately recommends that the reader’s mother enlist the services of an elder law attorney to determine the potential next steps.
“[An attorney] can advise her about qualifying for Medicaid, the government health program for the poor,” she said. “Medicaid will pay for long-term care expenses but rules vary by state, and a mistake could delay her eligibility.”
Weston also noted in response to a comment that while the interest on a reverse mortgage does not count as acquisition debt — making it non-tax-deductible — “relatively few homeowners get a tax deduction for any mortgage interest, thanks to the higher standard deduction.”
In the past, Weston has been critical of the reverse mortgage product, but she has also demonstrated understanding of the loan’s potential to assist older homeowners. In one instance, she highlighted a reverse mortgage as a potential tool to assist with the financing of long-term care.
