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5 Ways Reverse Mortgages Pay You Money

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A reverse mortgage is a loan where the lender pays a homeowner (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while he or she continues to live in the home. With a reverse mortgage, the homeowner retains title to the home.

Depending on the plan, a reverse mortgage becomes due with interest when the homeowner moves, sells the home, reaches the end of a pre-selected loan period, or dies. Because reverse mortgages are considered loan advances and not income, the amount received is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. The deduction may be limited because a reverse mortgage loan generally is subject to the limit on home equity debt. A lender commits itself to a principal amount, not to exceed 80 percent of the property’s appraised value.

Generally speaking, the higher the property value, the older the borrower(s), and the lower the current interest rates – the larger the loan. Although it is possible to find slight differences from lender to lender, most adhere to variables considered when calculating the maximum amount of a HECM Standard or HECM SAVER loan.

The IRS considers a reverse mortgage a loan, and because funds received by way of a loan are not considered income, the amount(s) the borrower(s) receive at any given time are not taxable.

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