4 Reverse Mortgage Questions Families Ask: Taxes, Property Charges, Refinancing & Scams

Meet Rosa, 56, who lives two states away from her parents, Frank and Elena, 79 and 77. They own their home outright and took a reverse mortgage last year for rising medical costs. Rosa is glad they did, but the fine print keeps her up at night. Are the draws taxable? What if property taxes climb and they cannot keep up? Can the loan be redone if rates improve? And why do so many ads seem aimed at her parents? These four questions come up in every family conversation I have.

I have spent close to three decades helping families understand reverse mortgages in plain, reassuring terms. Here are the current, researched answers, drawn from IRS, HUD, and CFPB guidance as of this writing.

1. Are Reverse Mortgage Proceeds Taxable, and Is the Interest Deductible?

The short answer on the money your parents receive: it is not taxable income. The IRS treats reverse mortgage payments, whether a lump sum, monthly advances, or line of credit draws, as loan proceeds, not income. Your parents do not report the money as earnings.

The interest is a different story, and this is the part CPAs care about. Interest on a reverse mortgage is generally not deductible as it accrues. Under current IRS rules it can only be deducted in the year it is actually paid, which normally happens when the loan is paid off, the home is sold, or an estate settles the balance. For most borrowers, the interest is never deducted during their lifetimes.

When it is paid, the interest only counts if it qualifies as deductible home mortgage interest. Under IRC section 163(h), interest on home equity debt is deductible only when the borrowed funds were used to buy, build, or substantially improve the home that secures the loan, such as a new roof, an addition, or a kitchen remodel. Ordinary repairs and maintenance do not qualify. Run your family's specifics past a tax professional.

2. What Happens If My Parents Fall Behind on Property Taxes or Homeowners Insurance?

A HECM has no monthly mortgage payment, but it does not remove the homeowner's responsibilities. Borrowers must keep property taxes, homeowners and flood insurance, HOA fees, and basic upkeep current. Falling behind on these is the most common way a reverse mortgage runs into trouble.

HUD has built protections into the program. Before closing, the lender completes a financial assessment of the borrower's ability to keep those charges paid. When needed, the lender sets aside part of the loan proceeds, called the life expectancy set-aside, or LESA, to cover property taxes and insurance over the borrower's estimated lifetime. Fixed-rate loans require a fully funded set-aside; adjustable-rate loans can use a partially funded one.

If the set-aside is exhausted and the charges go unpaid, the loan can fall into default. Even then, foreclosure is not immediate. The servicer must request HUD approval to call the loan due and payable, HUD expects the first legal action within about six months, and servicers are required to offer loss mitigation first, including repayment plans that let families catch up. A missed payment is a phone call, not the end of the story.

One honest caution: a 2024 audit by the HUD Office of Inspector General found HUD underestimated rising property taxes and insurance for an estimated 1,237 HECM borrowers, so some set-asides could run out sooner than planned. The takeaway is simple: set up automatic payments, revisit the amounts every year, and call the servicer at the first sign of trouble.

3. Can My Parents Refinance a Reverse Mortgage?

Yes, a HECM can be refinanced into a new HECM, what HUD calls a HECM-to-HECM refinance, and the rules are designed to protect families from paying for nothing. Generally, the existing HECM must be at least 18 months old, and the new loan must pass a net tangible benefit test: the increase in the principal limit must clearly outweigh the total cost. The lender must give your parents a disclosure comparing cost against benefit.

The process is not a quick form. Your parents would complete new counseling with a HUD-approved counselor, pass a new financial assessment, and order a new appraisal. On cost, the upfront mortgage insurance premium is reduced on refinances compared with a first-time HECM.

When does refinancing make sense? When rates have improved, when the home has appreciated and unlocked more equity, or when a spouse is being added to the loan. When does it not? When the added benefit is small and the costs eat it up. Get the actual numbers in writing before deciding.

4. How Can Families Protect Parents from Reverse Mortgage Scams?

Scams are real, and the official warnings are current. In February 2025, the HUD Office of Inspector General issued a fraud bulletin about contractors who pressure older adults into taking a reverse mortgage to pay for home repairs, then steal the proceeds. It followed the criminal conviction of a Chicago contractor who ran exactly that scheme. The pattern is consistent: an unsolicited offer, an urgent repair, and a promise that the homeowner will not really have to pay.

The CFPB warns of shopping scams, where a family member, caregiver, or stranger pressures an elderly homeowner into applying, or uses their identity without their knowledge. It has also flagged that a large share of reverse mortgage direct mail goes to lower-income households, a reminder that older adults are actively marketed to and need a careful second set of eyes.

Here is what families can do. Verify the lender is HUD-approved, since only HUD-approved lenders may make HECMs. Make sure counseling happens only through a HUD-approved counselor independent of the lender, found at hud.gov or by calling 1-800-569-4287. Never let a contractor handle the loan or collect the proceeds. Never pay upfront fees, sign under pressure, or agree to today-only deadlines. Never transfer the deed, because a reverse mortgage keeps the homeowner on the deed. Talk any proposal through with family, an advisor, or an attorney before signing.

If something feels wrong, report it. Suspected fraud can be reported to the FTC at ReportFraud.ftc.gov and to the HUD OIG hotline at 1-800-347-3735. A few minutes of reporting can protect the next family too.

The Takeaway for Families

Step back, and these four answers share one theme: the fears are bigger than the fine print. The money your parents receive is not taxable income, and interest is rarely deducted during their lifetimes, and then only for qualifying home improvements. Property taxes and insurance are the obligations that matter most, and HUD builds in set-asides and repayment plans for families who stumble. Refinancing is possible, but only worth it when the benefit clearly beats the cost. And the strongest defense against scams is a HUD-approved lender, a HUD-approved counselor, and a family member in the conversation.

Rosa left our last call sounding lighter. She set up automatic payments for her parents' property taxes, booked a session with their tax preparer, and now joins the weekly call whenever a lender or contractor emails her father. If your family is in a similar spot, a free, no-obligation consultation can walk you through the current rules, with no pressure and no jargon.