Per the Federal Trade Commission (FTC), HECM loans work by allowing homeowners to convert a portion of their house's equity into cash without having to sell the home or make regular monthly payments1.
Unlike a classic forward mortgage, where the borrower begins repaying the mortgage right away, borrowers do not have to pay off funds received through a HECM until after the final borrower no longer lives in the house2. There are no monthly loan payments required1.
For most Indian Land seniors, their house is their most important asset, and the one they have invested in the most throughout their lives. In fact, home equity now accounts for more than two-thirds of total net worth for the average senior American couple3.
HECM loans work by letting homeowners tap into their house's equity while still residing in their house well into their retirement years. Over 1.2 million American retirees have already made a HECM loan a powerful part of their retirement plan4.
Reverse vs. Forward Mortgage
When it comes to traditional and reverse mortgages, there are many differences and similarities. While classic mortgages require borrowers to make regular payments on the mortgage balance every month for many years, HECM loans don't require borrowers to make any monthly loan payments1.
Similarities:
- The homeowner keeps title and ownership of the home.
- Loans are secured by notes and deeds.
- Closing costs for a reverse mortgage are comparable to those for a traditional (forward) mortgage.
- The homeowner is responsible for insurance, property taxes, and maintenance.
Differences:
- Borrowers will never be required to pay back more than their house is worth (non-recourse loan) and they pay a modest FHA insurance premium to gain these benefits.
- Reverse mortgages don't require monthly mortgage payments to be made1.
- The credit line for a HECM loan can never be reduced; it is guaranteed to grow over time, regardless of the balance or your home's value.
- Borrowers must be 62 years of age or older in order to qualify for a reverse mortgage.
According to the Federal Housing Administration (FHA) rules, there are a few other aspects regarding how a Home Equity Conversion Mortgage works.
Borrowers need to use the house as their main residence while maintaining the house in good condition. Borrowers taking out a Home Equity Conversion Mortgage are also required to attend independent FHA-approved counseling prior to the closing of the loan.
How Can You Use HECM Cash?
The proceeds you receive from a HECM loan can be utilized for anything you’d like. Longbridge has several ways for how you can receive your money and how you choose to use this money depends completely on your personal financial situation and retirement goals. If you have an existing mortgage on your Indian Land home, the cash from the Home Equity Conversion Mortgage is first used to repay the loan. The remaining cash can be taken in any of the following distribution methods:
- Consistent, tax-free monthly payments.5
- A one-time payment, income tax-free.5
- A credit line, as a “safety net” for future use if needed.
- A combination of these methods.
Each homeowner is unique, and our clients have found creative ways to use a Home Equity Conversion Mortgage to improve their income, lifestyles, and monthly cash flow. These are just a few examples of how HECM loans work to your benefit:
- Reduce or eliminate debt or credit card balances.
- Help with healthcare costs, making "aging in place" easier.
- Support a family member with life expenses, like a down payment on a home or college tuition.
- Keep additional cash available to cover everyday expenses and bills.
- Save funds to assist in paying for long-term care down the road.
- Make updates, repairs, or modifications to your house to live more comfortably.
- Establish a line of credit for occasional expenses or emergencies.
- Lower your total taxable: prevent having to make taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the cash with income tax-free HECM funds5.
Can My Heirs Keep my Home?
Yes. One of the benefits of HECM loans is that your children have the option to get their own financing, repay the reverse mortgage, and keep the house in the Indian Land area. However, the funds to repay the reverse mortgage most often come from the sale of the house itself, once the home passes to your heirs.
In the rare event that the total amount of the reverse mortgage repayment is more than the value of the home, neither you nor your heirs would be required to repay the difference. Insurance from the FHA is a part of every Home Equity Conversion Mortgage, so it would cover any shortfall.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If there’s a forward mortgage on your house, the funds from the Home Equity Conversion Mortgage are initially used to repay that loan. As no monthly mortgage payments are needed on the HECM1, you can be done with that monthly bill and keep more income to use as you need.
One of the strongest features of South Carolina Home Equity Conversion Mortgages is that repayment is delayed. This means that repayment of the loan is not due until after the final borrower no longer resides within the house. The decision is yours on whether or not you would like to repay the reverse mortgage in advance. You will have no prepayment penalties with your Home Equity Conversion Mortgage. And with elective mortgage payments1, you can enjoy the freedom to pay as much or as little as you want, as regularly as you’d like.
How Much Money Can I Receive from a Reverse Mortgage?
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.
