wsjWhen it comes to reverse mortgage expertise, even the mighty Wall Street Journal can get it wrong.  Or, in this case, at least partially wrong.  Below is a question posed to Karen Damato in a recent Q&A column in Personal Finance.  She turns to AARP spokewoman, Nancy Thompson for the answer. Thompson’s answer, in my opinion, is short-sighted and indicates she may not be very current in her knowledge of “most reverse mortgage borrowers”.   Here’s a summary of the column;

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Q – Several years ago, when reverse mortgages first started getting popular, my wife and I took out a reverse mortgage on our home. We have noticed something that is a bit bothersome. The interest and fees charged monthly by the lender are high, but that isn’t the problem I am upset about. Rather, I find that these interest charges and fees aren’t deductible from our income taxes. Why not? If this were a regular mortgage we could at least deduct the amounts in our income-tax calculations. That is certainly not fair.

A – There’s a big difference between paying interest on a regular mortgage and on a reverse mortgage, and it has to do with timing: With a standard mortgage, borrowers pay interest each month, and they can deduct it on their taxes each year. With a reverse mortgage—which older homeowners can use to convert the equity in a home into spendable cash—the interest and certain fees that accrue each month are typically added to the balance of the loan.

The actual payment “doesn’t take place until the loan is repaid when the borrower either dies or sells the home—so the borrower can’t claim a tax deduction until that point,” says Nancy Thompson, a spokeswoman for AARP, an association for older adults.

In the year the reverse mortgage is repaid, the interest would be deductible against any income-tax liability of the borrower or the estate, Ms. Thompson says. But she adds that most borrowers won’t actually get a tax deduction because “most reverse-mortgage borrowers have low incomes and little tax liability.”
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AARP Reverse Mortgage Advice Poor

The problem with the answer is that it is only partially correct. A better response might have been to advise the borrower to make monthly payments back to the lender to cover the interest accruing on the loan. While it is not necessary to do this, it can be done… and then you would be able to deduct that interest on your tax return each year. Why would anyone whine that it is “not fair” to be prohibited from deducting interest that has not yet been paid?

Thompson’s second point that most reverse mortgage borrowers have low incomes is simply not an accurate statement.  Many of the reverse mortgage borrowers I work with today are middle class (or better) retirees with substantial home equity and retirement portfolios. They are using the reverse mortgage as a financial tool, often on advice of a financial planning professional. They are certainly not last resort borrowers. That perception is dated and pure myth. It is not helpful to have AARP representatives making such comments, in my opinion. It only contributes to the misinformation surrounding reverse mortgages.

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Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant