Will this HECM Reverse Mortgage have an IMPACT on MY TAXES or GOVERNMENT BENEFITS?
Reverse Mortgage Myth #1
If homeowners take out a reverse mortgage the lender will own their home.
Homeowners still retain title and ownership to their homes during the life of the loan, and can choose to sell the home at any time. Homeowners must continue to pay taxes and insurance, live in and maintain the home.
In This Article We Will Answer The Question…
This question comes up often during training conversations. Remember that I am not a tax planner or financial planner, and rules guiding these items can be changed anytime. I can only give general recommendations, but they will be handled as separate issues here.
WILL MY TAXES BE AFFECTED?
This can be subject to different factors. It should be well-defined that funds drawn through a HECM are NOT viewed as income, and are, therefore, NOT taxable. Meanwhile, if the funds are obtained and deposited into a bank account, then they become as the asset on which interests can be earned. Any interest received from a new, or higher, bank account are taxable.
On the contrary, there could be circumstances where accumulated interest that is paid on a HECM balance may be deductible like with the traditional, forward, mortgages. Charges paid at closing and payments made toward a Reverse Mortgage balance may affect tax deductions. However, HECMs do not require payments. Therefore, interest will accumulate, but is not “paid.” There are, in fact, not deductions except a borrower makes payments that are applied to the item that is deemed a deduction.
Reverse Mortgage Myth #2
There are restrictions on how reverse mortgage proceeds may be used.
There are no restrictions. The cash proceeds from the reverse mortgage can be used for virtually any purpose and borrowers should be cautious of lenders attempting to cross sell other products. Many seniors have used reverse mortgages to pay off debt, help their kids, make ends meet or to have a financial reserve. *Annuities are restricted.
WILL MY GOVERNMENT BENEFITS BE AFFECTED?
Also, this is subject to certain situations. Borrowing a substantial amount of cash from home equity and depositing it in a bank account might be a problem for specific benefits that are “means-tested.” A “means test” is a process of deciding if someone is eligible for assistance. If someone has the “means” to do without the aid, they may not be qualified to receive it.
Therefore, it is subject to the answers provided to two questions:
- Will means testing affect the government benefit?
- Is the monthly drawn amount more than the benefit’s limits?
Medicare and Social Security are not currently means tested. Therefore, Medicare and Social Security are usually not affected by Reverse Mortgage earnings. Meanwhile, Medicaid and Supplemental Security (SSI) may have assets or income requirements. It is significant to know that the amount kept in a bank account could hinder one from receiving that assistance. Consequently, it is expedient for the homeowner to consult with a benefits administrator or advisor to make sure they are not jeopardizing their financial plan.
Federal Trade Commission: www.consumer.ftc.gov
Reverse mortgage loan advances are tax-exempt, and usually do not affect your Medicare and Social Security benefits. You keep the title to your property, and you are not required to make monthly repayments. However, the loan must be repaid when the last surviving borrower passes on, sells the home, or fails to live in the home as a primary residence any longer.
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Looks like you put a lot of work in here. Great information and very helpfull Brandon 07/26/2016
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The services referred to herein are not available to persons located outside the state of California.
Borrower is responsible for property taxes, homeowners insurance, and property maintenance. A HECM is a home-secured debt payable upon default or a maturity event. Some restrictions apply. This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency.