A Home Equity Conversion Mortgage (HECM), the FHA-insured reverse mortgage program, allows homeowners aged 62+ to access their home equity as tax-free loan proceeds (not income, per IRS rules). These funds can help cover tax obligations (such as property taxes, which borrowers must pay to avoid default).
Here are three key ways equity is accessed via a HECM to help with tax obligations:
- Direct use of cash disbursements — Borrowers can receive proceeds as a lump sum, monthly payments, line of credit, or combination, and use the funds freely to pay property taxes (or other tax obligations) directly, providing flexible cash flow without monthly mortgage repayments.
- Life Expectancy Set-Aside (LESA) account — If a financial assessment shows challenges meeting obligations (or if chosen voluntarily), a portion of the HECM principal limit is set aside in a LESA to cover future property taxes and insurance; the lender pays these charges from the set-aside funds as due, ensuring timely payments and preserving other accessible equity.
- Withholding from ongoing disbursements — In cases where a set-aside isn't required but assistance is needed, borrowers can authorize the lender to withhold and pay property taxes directly from monthly advances or line-of-credit draws, converting equity access into automated tax coverage.
