When a borrower voluntarily pays the interest of a reverse mortgage to control the compounding of the loan, the borrower who wishes to manage their retirement savings through the use of home equity through a reverse mortgage can enjoy positive tax benefits. This is what Shelley Giordano, co-founder of the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Champaign and Enterprise Integration at Mutual of Omaha Mortgage, said in a new column on The Street.
“As advisors know more about reverse mortgages, they tend to recommend their use to clients whose financial profile is more likely to benefit from a deduction of accrued interest,” writes Giordano. “This increased convenience in recommending a reverse mortgage is corroborated by an academy survey of financial professionals, which confirmed that higher levels of education and experience correlate with increased use of reverse mortgages.”
The reverse mortgage loan pays interest with no mandatory monthly payments. To control the compounding of interest, a borrower can make voluntary payments on the interest of the loan, and the idea of making payments at certain times and suspending payments at other times is an idea that is gaining traction with authorities in the financial world, you writes.
“Pension researcher Wade Pfau […] recommends that the homeowner make voluntary payments, but withhold these payments in years when drawing on pension funds would put a strain on the portfolio, ”writes Giordano. “Since there are no payments required by loan terms while the borrower is living in the home, the homeowner is free to decide when and if a payment suits their cash flow / portfolio maintenance needs.”
However, that does not mean that a borrower cannot be served by accruing interest.
“There may be situations where the homeowner would accumulate interest over the years and later make a large payment to reduce the loan balance,” she writes. “At the same time, this would lead to a substantial interest deduction. How [Michael] Kitces explains that for the most efficient use, there must be enough taxable income to absorb the deduction. Kitces also mentions that the client could opt for a Roth conversion to absorb the interest deduction. “
Adjustable rate reverse mortgage payments can also help improve the loan’s standby line of credit, Giordano writes.
“This revolving line is poised to fund future spending shocks, market turmoil, and / or a longer lifespan,” she writes. “In contrast to a conventional home equity line of credit (HELOC), the lender may not terminate, freeze or reduce the line of credit. As the homeowner ages, their access to equity is guaranteed to grow at the rate of interest that accrues on the loan taken out. This growth component of the [reverse mortgage] The line of credit remains in place for the life of the loan, regardless of the future value of the home.
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