According to the Federal Trade Commission (FTC), this type of loan works by allowing homeowners to convert a percent of their house's equity into cash without the need to sell their house or make regular monthly payments1.
Unlike a typical forward mortgage, where the borrower must begin repaying the loan immediately, borrowers do not have to pay off funds received through a HECM until after the final borrower stops living in the home2. There are no monthly loan payments required1.
How Can You Use Reverse Mortgage Funds?
The cash you get from a reverse mortgage can be used for anything you’d like. We provide several ways for receiving proceeds and how you decide to use the funds depends on your personal financial situation and retirement goals. If you have a current mortgage on the home, the funds from the Home Equity Conversion Mortgage will first be used to pay off the loan. The remaining money can then be received in any of the following distribution methods:
- A single payment, income tax-free.4
- Steady, tax-free monthly payments.4
- A credit line, as a “safety net” for later use if needed.
- A combination of these methods.
Every borrower is unique, and our clients have found creative ways to use a HECM loan to improve their incomes, lifestyles, and monthly cash flow. These are just a few illustrations of how Home Equity Conversion Mortgages work to your advantage:
- Lower your total taxable: avoid making taxable withdrawals from 401(k) or other retirement plans by replacing the funds with income tax-free HECM funds5.
- Establish a line of credit for emergencies or occasional expenses.
- Keep extra cash available to cover regular expenses and bills.
- Eliminate or reduce credit card balances or other debts.
- Assist with medical bills, making it easier to “age in place.”
- Set aside cash to assist in paying for long-term care down the road.
- Make modifications, improvements, or repairs to your home to live more comfortably.
- Help a family member with large expenses, such as a down payment on a home or college tuition.
Can My Heirs Keep the House?
Yes. One of the positives of Home Equity Conversion Mortgages in California is that the program provides your children with the option to arrange alternative financing, pay off the reverse mortgage, and keep the house in Soquel. However, the money to repay the HECM loan typically comes from the sale of the house itself, once the home passes to your heirs.
In the rare event that the amount of the HECM loan repayment is higher than the house is worth, neither your heirs nor you will be obligated to repay the difference. Insurance from the FHA is a component of every Home Equity Conversion Mortgage, so it would cover any shortfall.
