A reverse mortgage is a loan where the lender pays a homeowner while he or she continues to live in 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.
Although some private lenders may offer different plans, generally there are five ways that a borrower can receive money:
1. Lifetime or Tenure This plan offers equal monthly payments which will be paid as long as the borrower(s) are alive and continue to occupy the property as a principal residence.
2. Period Certain or Term This plan offers the borrower(s) equal monthly payments that will be paid over a predetermined fixed period of months. The time period and payment amount is set prior to the first payment and cannot be changed. If the borrower(s) die before the end of the period, the payments will continue for the remaining period to their identified beneficiary or beneficiaries.
3. Line of Credit This plan provides for the establishment of an account that makes a predetermined amount of money accessible to the borrower at any time up until such time as the line of credit is exhausted.
4. Combo or Modified Tenure This is a combination of line of credit and scheduled monthly, or a single lump sum payment with the remainder of the funds being distributed in predetermined payments or as a line of credit.
5. Combo Modified Term
This plan is a combination of a line of credit plus monthly payments for a fixed period of months selected by the borrower.
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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