Reverse Mortgages – 2021 – CPA Clinics

The examples are for illustration purposes only. The actual amount of payment, line of credit, or lump sum depends on the location, appraisal value, age of the borrower and current interest rate. Only a mortgage contract can guarantee a payment, term, or interest rate.

Example #1: Louise, a single taxpayer age 64, owns her home. Her home is worth $175,000 and she owns it outright. Her monthly sources of income include Social Security of $1,250 and a pension of $1,400. She needs $3,000 per month to live on and has no other assets to generate income. Louise takes a reverse mortgage and receives a monthly payment of $505. The annual income from the reverse mortgage of $6,060 is not taxable. In addition, the reverse mortgage payment does not cause any of her Social Security benefits to be taxable.

Example #2: Jack, age 75, and Margaret, age 72, owe $20,000 on their current mortgage. Their home is worth $100,000 and their current payment on their mortgage is $700 per month. Jack and Margaret take out a lump-sum reverse mortgage of $20,000 and use it to pay off the $20,000 mortgage. They no longer have a house payment which frees up $700 per month. The amount used to pay off the original mortgage is not taxable for Jack and Margaret.

Example #3: William, age 65, is looking to retire. He is concerned that he needs to wait seven more years because his mortgage will not be paid off until then. He owes $65,000 on his current mortgage and his monthly payment is $900. His home is worth $225,000. In reviewing his anticipated retirement income and expenses, if he were to retire today, he would have a shortage each month of $400.

William decides to do a reverse mortgage to pay off his $65,000 mortgage. In addition, the reverse mortgage generates a monthly income of $288. Instead of waiting seven years to retire, William has the choice to be able to retire immediately.