Recently, reverse mortgages have received more attention and praise for the numerous tax-free cash benefits they offer to homeowners. While it’s true that these loans present great opportunities for retirees to support their savings with income from their home equity, the process of earning tax-free cash isn’t so simple. Here, we’ll review how reverse mortgages work and how to earn tax-free cash benefits in a better light.
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Overview of Reverse Mortgages
Reverse mortgages are home loans that reverse the payment process, where lenders pay the borrower part of their home’s market value. Often, borrowers think they can access their home’s full value, which risks their homeownership if not paid back; however, it’s impossible for lenders to revoke homeownership.
Truthfully, reverse mortgage borrowers can only access part of their home equity since the loan first must pay current mortgages, debts, or bills. Afterwards, homeowners can use and receive payments as a lump sum, monthly installment, or line of credit. Since reverse mortgages primarily help long-term homeowners, they’re designed for retirees 62 years or older (55 in some states). Best of all, the loan is only due upon leaving the property. If homeowners pass away before paying, relatives can pay or use home sale proceeds to pay off the loan. Whatever is left after paying the loan goes to your heirs; however, if the home sells below market value, the mortgage firm settles the difference.
Tax-free Cash Implications with a Reverse Mortgage
It’s true that reverse mortgages offer various tax benefits such as tax-free cash for retirees needing more financial support. Yet, certain regulations and restrictions apply for borrowers to receive such benefits. Here’s an in-depth look at the process to receive tax-free funds from a reverse mortgage:
Tax-free Income
No matter the type of loan or payment method you select, all reverse mortgage funds are considered tax-free cash. Though these payments seem like income, IRS guidelines classifies reverse mortgages as loans since they will be paid in the future. As a result, retirees receive more income from their home equity in exchange for the future repayment on the home to the lender.
Interest on Tax-free Cash
Another way to earn more tax-free cash from a reverse mortgage is by deducting the loan interest. If the loan funds are used to purchase, repair, or remodel the home, said payments can be deducted during tax season. However, the accrued interest only becomes deductible once the loan is fully repaid. All other proceeds used for living expenses or bills are not applicable for tax deductions.
Social Security and Medicare Benefits
As far as government aid programs go, the tax-free cash from a reverse mortgage does not impact eligibility for Social Security or Medicare benefits. Rather, borrowers using a reverse mortgage can actually boost their retirement benefits in these programs by delaying the use of those assets, allowing them to grow in value by using their tax-free funds for income.
Often, retirees will use a Home Equity Conversion Mortgages (HECM) to get tax-free cash since this government-funded loan offers numerous regulations to protect borrowers. Yet, the restrictions and payments on these loans could affect your eligibility for other programs. HECMs and other reverse mortgage loans require a counseling session with a government lender at an approved government bank. This process educates people about the payments and rules involved with a reverse mortgage. Furthermore, the eligibility of aid from Medicaid and Supplemental Security Income (SSI) programs may be affected by what payment type borrowers use, as having a lump sum of home equity assets could affect whether they need support.
Receive Tax-free Cash Benefits with PCL Financial
Retirees can find the best supplementary income support for their retirement savings with the tax-free cash benefits offered by reverse mortgages. Designed to protect homeownership, seniors can rest assured that their finances, security, and government aid for the future is guaranteed with the funds from their home equity. For the best counseling and planning for your home equity loan, trust that the mortgage experts at PCL Financial Group will support your journey into retirement. Learn more about PCL’s reverse mortgage options by checking out our Loan Programs today!
