10.1 BENEFITS OF THE HECM
Homeowners may experience several important benefits, depending on what their situation is and how they use the loan.
A. No mortgage payment B. Better cash flow
C. Ability to afford things they otherwise could not 10.2 OTHER FINANCIAL IMPLICATIONS
On the other hand, homeowners may experience other consequences of the HECM that may or may not be so positive for them. Part of the counselor’s job is to alert the
homeowner to these potential consequences.
According to the law establishing the HECM program,
counselors must advise prospective borrowers that a reverse mortgage "may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner."
A. Tax Consequences:
1. HUD-approved reverse mortgage counselors do not provide legal or tax advice unless they are trained in those fields. However, they may cite information on the general nature of these financial implications that has been published by other sources.
2. Source: IRS.gov, Publication 936, 2010 edition, Home Mortgage Interest Deduction: “Because reverse
mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt….”
3. Source: IRS.gov, Publication 575, 2010 edition: Pension and Annuity Income
“In general, you can recover the cost of your pension or annuity tax free over the period you are to receive the payments. The amount of each payment that is more than the part that represents your cost is taxable.”
a. In other words, if a borrower uses a reverse mortgage to buy an annuity that yields monthly payments, part of every payment is taxable. There is a formula to divide each payment into taxable and non-taxable portions.
b. Income from other types of investments made with reverse mortgage proceeds would be similarly subject to taxation based on rules for those types of income.
B. Public Benefits: Most reverse mortgage borrowers either do receive or expect to receive important public benefits such as Social Security and Medicare.
Others may receive or may be eligible for a variety of other benefits such as Supplemental Security Income (SSI) or Medicaid. It is vital for borrowers to understand how the reverse mortgage may affect these benefits.
1. Social Security: Social Security is a guaranteed stream of retirement income, funded by payroll taxes. Most people who have worked in paid employment are eligible, though there are exceptions such as Federal
workers, railroad retirees, and some other public employees such as teachers in some states. (These workers receive their retirement income from another source such as a Federal, State, or Railroad retirement plan.)
a. Benefit amounts are based on the worker’s earnings over the period they paid into the system. A person must have at least 10 years of total work income in order to qualify for the minimum benefit under their own work record.
b. A spouse who did not work may receive benefits based on their working spouse’s contributions.
c. A widowed spouse may choose between her own benefit and that of the deceased spouse.
d. Social Security benefits are NOT affected by reverse mortgage loan advances.
2. Medicare: Medicare is the federal health insurance program for people who are either over 65 or disabled under Social Security guidelines. It is funded by payroll taxes and other federal funding.
a. Medicare benefits are NOT affected by reverse mortgage loan advances.
3. “Means-tested” benefits: These are public benefits that are only available to people who qualify based on their income and assets.
They are typically aimed at low-income people a. Means-tested benefits MAY be affected
by reverse mortgage loan advances.
b. Reverse mortgage loan advances are NOT considered income.
c. However, loan advances that are retained in a borrower’s bank account may be
counted as assets (also referred to as “liquid resources” or
“reserve”).
i. As a result, low-income borrowers who receive public benefits may be at risk of losing valuable assistance that they depend on.
ii. The risk is especially high for fixed-rate loans that require a full initial lump sum draw.
10.3 BENEFITS 101: Reverse mortgage counselors are not expected to be prepared to do detailed benefits counseling. However, it is important to be familiar with some of the major means-tested benefits that borrowers may be receiving so that you can alert them to possible problems and refer them to experts for more details about how the reverse mortgage may affect them.
x Medicaid x SSI
x Food Stamps (Food and Nutrition Services) x Medicare Savings (QMB, SLMB, etc)
x Medicare Part D Low Income Subsidy x Some Veterans Administration benefits x Prescription assistance programs x Payment plans for medical bills A. Medicaid:
1. Medical insurance for very low-income seniors and disabled individuals
aid
2. For those with Medicare, Medicaid serves as supplemental coverage, paying for Medicare deductibles and copayments, and usually offering some additional services.
3. Combination of Federal and state funding 4. Benefits and eligibility guidelines vary
state-to-state
a. Income limits may match SSI limits or may be indexed to the Federal Poverty Level or other guideline.
b. Some states are much more generous than others.
c. Some individuals with extremely high medical costs may qualify even if their income is higher than the standard limit.