Under the U.S. Department of Housing & Urban Development and insured by the Federal Housing Administration, The Home Equity Conversion Mortgage program utilizes home equity in three ways. Tax Free Income, Purchasing a Home and Establishing an Appreciating Equity Line of Credit.
HECM tax-free income during retirement is a huge benefit for seniors. The tax-free income is generated from home loans from a senior’s primary residence based on ages 62 or higher. Equity home loans are not characterized as income, so they’re not includible in the provisional income test for Social Security taxation. That is an additional value for seniors.
One of the most significant uses of HECM tax-free income is to delay Social Security benefits until age 70 for those seniors who retire at age 62. When you take your Social Security at age 62 you’re only receiving 25% of your full retirement benefit. By waiting until age 70, your benefit plus any cost of living adjustments, along the way, will increase to 132% for those born between 1943 and 1954. By using a tax-free income from a HECM loan, seniors can still retire early and maximize their Social Security benefits. At age 70 they have options: They can decide to continue to take the HECM tax-free income or to stop the income. If they decide to stop the income, they can choose to pay back the loans or not. But for most middle class seniors, HECM tax-free is a decision to take the tax-free income for life.
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