Per the Federal Trade Commission, this type of loan works by allowing homeowners to convert a portion of their house's equity into cash without the need to sell the home or make regular monthly payments.
Unlike a classic forward mortgage, where the borrower begins paying down the mortgage right away, homeowners do not need to pay off money received through a reverse mortgage until after the last borrower no longer lives in the house. There are no monthly loan payments required1.
How Can HECM Proceeds Be Used?
The proceeds you receive from a HECM loan can be utilized in any way you wish. We offer several ways for receiving funds and how you choose to use your cash depends entirely on your retirement goals and personal financial situation. If you have an existing mortgage on the house, the money from the HECM loan 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 homeowner is unique, and our customers have discovered creative ways to use a HECM loan to improve their incomes, lifestyles, and monthly cash flow. These are just a few examples of how HECM loans work to your benefit:
- Have more funds available to pay for everyday bills and expenses.
- Reduce or eliminate credit card balances or other debts.
- Help with healthcare bills, making it easier to “age in place.”
- Set aside funds to help pay for long-term care in the future.
- Finish modifications, improvements, or repairs to your home to help you live more comfortably.
- Decrease your total taxable income: prevent having to make taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the cash with income tax-free HECM funds4.
- Create a credit line for emergencies or occasional expenses.
- Support a child or grandchild with life expenses, like college tuition or a down payment on a home.
Can My Children Keep my Home?
Yes. One of the benefits of how reverse mortgages work is that your children have the option, if they desire, to get their own financing, pay off the HECM and keep the home. However, the funds to pay off the HECM loan most often comes from the sale of the home itself, once the house passes to your heirs.
In the rare event that the total amount of the loan repayment is higher than the value of the house, neither your heirs nor you would be responsible for repaying the difference. Insurance from the FHA is a part of every Home Equity Conversion Mortgage, so that would pay any shortfall.
