Per the Federal Trade Commission (FTC), HECM loans work by allowing homeowners to convert part of their house's equity into cash without the need to sell their house or make regular monthly payments1.
Unlike a traditional forward mortgage, where the borrower must begin paying down the mortgage right away, borrowers do not need to pay off money received through a reverse mortgage until after the final borrower no longer lives in the home2. There are no monthly mortgage payments required1.
For many seniors in Laguna Niguel, their house is their biggest asset and the one they have invested the most money in throughout their lives. In fact, home equity now represents more than 66% of all wealth for an average senior American couple3.
HECM loans work by allowing homeowners to tap into their house's equity while continuing to reside there well into their retirement years. Over 1.2 million American seniors have already made a reverse mortgage part of their retirement plan4.
HECM vs. Classic Mortgage
Regarding reverse mortgages and traditional mortgages, you'll find many similarities and differences. While traditional mortgages require borrowers to make consistent payments on the loan balance monthly for several years, reverse mortgages don't require homeowners to make any monthly mortgage payments1.
Similarities:
- The owner retains the deed and ownership of the house.
- The homeowner is responsible for insurance, maintenance, and property taxes.
- Loans are secured by notes and deeds.
- Closing costs for a reverse mortgage are comparable to those for a classic (forward) mortgage.
Differences:
- HECM loans do not require monthly loan payments to be made1.
- The line of credit for a HECM loan will never be lowered; it's guaranteed to grow over the life of the loan, regardless of the balance or home value.
- Borrowers will never be required to repay more than the house is worth (non-recourse loan), and the borrower pays a moderate FHA insurance premium to gain these loan features.
- The borrower is required to be 62 years of age or older in order to apply for a reverse mortgage.
Per the Federal Housing Authority (FHA) regulations, there are more factors regarding how a Home Equity Conversion Mortgage works.
Homeowners are required to use the house as their primary residence while maintaining the home in good condition. Borrowers receiving a HECM loan are also required to partake in third-party FHA-approved counseling as part of the loan process.
How Can HECM Cash Be Used?
The proceeds you get from a reverse mortgage can be utilized in any way you wish. Longbridge has many methods for receiving funds and how you use your cash depends on your personal financial situation and retirement goals. If you have a current mortgage or lien on your Laguna Niguel home, the funds from the reverse mortgage will first be used to pay off the loan. The remaining funds can then be received in any of the following distribution methods:
- A single payment, income tax-free.5
- Steady, tax-free monthly payments.5
- A credit line, as a “safety net” for later use if needed.
- A combination of these methods.
Each borrower is different, and our customers have discovered creative ways to use a HECM loan to improve their monthly cash flow, lifestyles, and incomes. Here are a few quick examples of how HECM loans work to your advantage:
- Keep extra cash available to cover regular expenses and bills.
- Eliminate or reduce debt or credit card balances.
- Assist with healthcare costs, making it easier to “age in place.”
- Set aside money to help pay for long-term care in the future.
- Make updates, repairs, or modifications to your house to live more comfortably.
- Decrease your taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the cash with income tax-free HECM funds5.
- Create a line of credit for emergencies or occasional expenses.
- Help a family member with large expenses, like a down payment on a home or college tuition.
Can My Heirs Keep the House?
Yes. One of the benefits of HECM loans is that your children have the option to get alternative financing, pay off the HECM, and keep the house in Laguna Niguel. However, the money to repay the HECM loan most often comes from the sale of the home itself, after the house passes to your children.
In the rare event that the total amount of the reverse mortgage repayment is more than the home is worth, neither your heirs nor you would be obligated to repay the difference. Insurance from the FHA is a component of every Home Equity Conversion Mortgage, so that would pay any shortfall.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If there’s a traditional mortgage on your home, the cash from the Home Equity Conversion Mortgage is initially used to pay off that loan. Since no monthly mortgage payments are required on the HECM1, you can get rid of that monthly bill and keep more cash to use as you need.
One of the largest benefits of how reverse mortgages work in California is that repayment is delayed. This means that the loan repayment is not due until after the final borrower no longer resides within the house. The choice is yours as to whether or not you would like to repay the reverse mortgage ahead of time. There are no prepayment penalties with Home Equity Conversion Mortgages. And with voluntary mortgage payments1, you have the freedom to pay as much or as little as you desire, as regularly as you’d like.
How Much Money Can I Get with a Reverse Mortgage?
There are multiple factors that go into calculating how much of your house’s equity you can convert to cash with a reverse mortgage. Age, current interest rates, and your home's appraised value are all taken into consideration. Often, the amount of cash you can get qualified for will be between 50% and 70% of your house’s value. The quickest way to get a quote is to use our Free Quote Calculator. It is a complimentary, no-obligation tool which offers a fast and accurate quote in minutes.
