Also known as a Home Equity Conversion Mortgage (HECM), this loan program has been overseen by the Federal Housing Administration since 1988.
According to the Federal Trade Commission (FTC), reverse mortgages work by letting homeowners turn a portion of their house's equity into cash without having to sell their house or make regular monthly mortgage payments. Dissimilar from a classic forward mortgage, where the homeowner must begin repaying the mortgage immediately, borrowers do not have to pay off money received from a reverse mortgage until after the last borrower no longer lives in the home. Monthly mortgage payments are not required1.
For most seniors in California, their house is their largest asset, and the one they have invested the most money in throughout their lives. In fact, equity in homes now represents more than two-thirds of total net worth for an average senior American couple2.
Reverse mortgages work by allowing homeowners to tap into their house's equity while still residing in their house well into the retirement years. More than 1.2 million Americans have already made a reverse mortgage a powerful part of their retirement plan3.
Reverse Mortgage vs. Traditional Mortgage
When it comes to traditional and reverse mortgages, there are many similarities and differences. While conventional mortgages require homeowners to make regular payments toward the mortgage balance monthly for many years, reverse mortgages don't require homeowners to make any monthly mortgage payments1.
Similarities:
- The owner retains title and ownership of the house.
- The homeowner is responsible for insurance, maintenance, and property taxes.
- Both mortgages are secured by deeds and notes.
- Closing costs for a HECM are similar to those for a conventional (forward) mortgage.
Differences:
- HECM loans do not require monthly loan payments to be made.
- The credit line for a Home Equity Conversion Mortgage can never be reduced; it's guaranteed to grow over the life of the loan, regardless of the balance or home value.
- The borrower will never be asked to pay back more than their house is worth (non-recourse loan), and pays a moderate FHA insurance premium to gain these benefits.
- The borrower must be 62 years of age or older to apply for a reverse mortgage.
Per the Federal Housing Administration (FHA) guidelines, there are more aspects regarding how a Home Equity Conversion Mortgage works.
Borrowers are required to use the house as their main residence while keeping the home in satisfactory condition. Borrowers taking out a Home Equity Conversion Mortgage must also attend independent FHA-approved counseling before closing.
How Can Reverse Mortgage Funds Be Used?
The proceeds you receive from a reverse mortgage can be utilized for anything you wish. We provide several ways for receiving funds and how you use your cash depends on your retirement goals and personal financial situation. If you have an existing mortgage on your house, the funds from the HECM loan will first be used to pay off the balance. The remaining money can be received in any of the following ways:
- A one-time payment, income tax-free.4
- Consistent, tax-free monthly payments.4
- A line of credit, as a “safety net” for later use if and when you need it.
- Any combination of these.
Every borrower is different, and our customers have found creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are just a few examples of how reverse mortgages can work to your benefit:
- Have more cash available to pay for regular bills and expenses.
- Eliminate or reduce debt or credit card balances.
- Assist with healthcare expenses, making it easier to “age in place.”
- Save funds to help pay for long-term care down the road.
- Make repairs, updates, or improvements to your house to live more comfortably.
- Lower your taxable income: prevent having to make taxable withdrawals from 401(k) or other retirement plans by replacing the cash with income tax-free HECM funds4.
- Create a credit line for occasional expenses or emergencies.
- Help a family member with large expenses, such as college tuition or a down payment on a home.
Will My Children Keep my Home?
Yes. One of the positives of HECM loans is that your heirs have the option to arrange their own financing, pay off the reverse mortgage and keep the house. However, the money to repay the reverse mortgage usually comes from the sale of the home itself, once the house passes to your heirs.
In the unlikely event that the total amount of the reverse mortgage repayment is more than the house is worth, neither your heirs nor you would be obligated to repay the difference. FHA insurance is a part of every HECM, so that would cover any shortfall.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If you have a typical mortgage on your house, the funds from the reverse mortgage is first used to pay off that loan. As no monthly mortgage payments are needed on the HECM1, you can eliminate that monthly bill and keep more money to use as you see fit.
One of the strongest benefits of Home Equity Conversion Mortgages is that repayment is deferred. This means that the loan repayment is not due until after the final borrower no longer resides within the house. The decision is yours as to whether or not you would like to pay off the reverse mortgage in advance. There are no prepayment penalties with a HECM loan. And with discretionary mortgage payments1, you have the freedom to pay as little or as much as you desire, as often as you’d like.
How Much Money Can I Receive from a HECM Loan?
There are many elements that go into determining how much of your house’s equity you can convert to cash with a reverse mortgage. Your home's appraised value, age, and current interest rates are all taken into consideration. Often, the amount of money you can qualify for will be between 50% and 70% of your home’s value. Contact me to get your free, no-obligation, personalized quote.
