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.
For most Americans, their house is their largest asset, and the one which they have invested the most money in during their lives. In fact, home equity now accounts for more than two-thirds of total wealth for the average retired American couple2. HECM loans work by allowing homeowners to tap into their house's equity while still living in their house well into the retirement years. More than 1.2 million American seniors have already made a reverse mortgage a powerful part of their retirement plan3.
Reverse mortgages work by letting homeowners tap into their home’s equity while still residing in their house well into the retirement years. More than 1.2 million Americans have already made a HECM loan an important part of their retirement plan4.
Reverse Mortgage vs. Classic Mortgage
When it comes to reverse mortgages and traditional mortgages, you'll find several similarities and differences. While classic mortgages require borrowers to make consistent payments on their loan balance monthly for many years, reverse mortgages do not require homeowners to make any monthly mortgage payments1.
Similarities:
- The homeowner keeps title and ownership of the home.
- The owner is responsible for insurance, maintenance, and property taxes.
- Both mortgages are secured by notes and deeds.
- Closing costs for a HECM are similar to those for a conventional (forward) mortgage.
Differences:
- Reverse mortgages don't require monthly mortgage payments to be made.
- Your line of credit for a HECM loan will never be lowered; it is guaranteed to increase over time, regardless of loan balance or home value.
- Borrowers will never be required to repay more than the home is worth (non-recourse loan), and pays a moderate FHA insurance premium to gain these loan features.
- The borrower are required to be 62 years of age or older in order to apply for a reverse mortgage.
According to the FHA (Federal Housing Authority) guidelines, there are additional factors regarding how a reverse mortgage works.
Homeowners need to use the home as their primary residence while keeping the house in satisfactory condition. Homeowners receiving a Home Equity Conversion Mortgage are also required to attend third-party FHA-approved counseling prior to closing.
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.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If you have a typical mortgage on your house, the funds from the HECM loan is initially used to repay that loan. As no monthly mortgage payments are required on the HECM1, you can eliminate that monthly bill and keep more income to use as you need.
One of the biggest features of how Home Equity Conversion Mortgages work is that repayment is delayed. This means that repayment of the loan is not due until after the final borrower no longer lives in the house. The choice is yours on whether or not you would like to repay the HECM in advance. There are no prepayment penalties with a reverse mortgage. And with elective mortgage payments1, you have the freedom to pay as much or as little as you want, as often as you would like.
How Much Money Can I Get with 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.
