Reverse mortgage or HECM restrictions

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 some uses may be deductible up to $100,000). 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.

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