Per the Federal Trade Commission (FTC), this type of loan works by letting homeowners turn a percent of their home’s equity into cash without the need to sell their house or make regular monthly payments1.
Dissimilar from your classic forward mortgage, where the borrower begins paying down the loan right away, borrowers do not need to pay off funds received through a HECM until after the last borrower stops living in the house2. There are no monthly mortgage payments required1.
For many retirees in Camas, their home is their largest asset, and the one they have invested the most money in throughout their lives. In fact, equity in homes now represents more than 66% of wealth for the average retired American couple3.
Reverse mortgages work by letting homeowners access their house's equity while still residing in their house well into the retirement years. Over 1.2 million American seniors have already made a HECM loan an important part of their retirement plan4.
Reverse Mortgage vs. Forward Mortgage
Regarding traditional and reverse mortgages, you'll find many differences and similarities. Where conventional mortgages require homeowners to make scheduled payments toward the mortgage balance every month for many years, HECM loans don't require borrowers to make any monthly loan payments1.
Similarities:
- The owner keeps title and ownership of the house.
- The owner is responsible for property taxes, insurance, and maintenance.
- Both mortgages are secured by notes and deeds.
- Closing costs for a reverse mortgage are similar 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 can never be reduced; it's guaranteed to increase over time, regardless of loan balance or your home's value.
- Borrowers will never be required to repay more than their house is worth (non-recourse loan) and they pay a moderate FHA insurance premium to gain this protection.
- The borrower must be at least 62 years old to qualify for a Home Equity Conversion Mortgage.
According to the Federal Housing Administration (FHA) regulations, there are a few other elements regarding how a reverse mortgage works.
Borrowers must use the house as their primary residence while maintaining the home in satisfactory condition. Borrowers taking out a HECM loan must also receive independent FHA-approved counseling prior to the closing of the loan.
How Can You Use HECM Cash?
The cash you receive from a Home Equity Conversion Mortgage can be utilized for anything you wish. We offer many methods for receiving funds and how you choose to use this money depends entirely on your personal financial situation and retirement goals. If there is a current mortgage on the house, the money from the reverse mortgage is first used to repay the loan. The remaining funds can then be taken in any of the following ways:
- A one-time payment, income tax-free.5
- Consistent, tax-free monthly payments.5
- A line of credit, as a “safety net” for future use if needed.
- A combination of these methods.
Every homeowner is different, and our clients have found creative ways to use a HECM loan to improve their monthly cash flow, lifestyles, and incomes. Here are just a few examples of how HECM loans work to your advantage:
- Make repairs, updates, or improvements to your house to help you live more comfortably.
- Have more money available to pay for regular bills and expenses.
- Reduce or eliminate debt or credit card balances.
- Assist with healthcare expenses, making "aging in place" easier.
- Save money to assist in paying for long-term care down the road.
- Establish a line of credit for occasional expenses or emergencies.
- Assist a family member with large expenses, like college tuition or a down payment on a home.
- Decrease your total taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the funds with income tax-free HECM funds5.
Can My Heirs Keep the House?
Yes. One of the benefits of Home Equity Conversion Mortgages is that your heirs have the option to arrange their own financing, repay the loan, and keep the Camas home. However, the funds used to repay the HECM loan typically come from the sale of the home itself, once the home passes to your heirs.
In the rare event that the amount of the HECM loan repayment is more than the house is worth, neither you nor your heirs will be responsible for repaying the difference. FHA insurance is a part of every HECM, so it would pay any shortfall.
Can I Eliminate Monthly Mortgage Payments?
Yes. If you have a traditional mortgage on your house, the cash from the Home Equity Conversion Mortgage is initially used to repay that loan. Since no monthly mortgage payments are required on the HECM1, you can eliminate that monthly bill and keep more money to use as you see fit.
One of the largest benefits of Home Equity Conversion Mortgages is that repayment is deferred. 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 want to repay the HECM in advance. You will have no early payment penalties with a Home Equity Conversion Mortgage. And with voluntary mortgage payments1, you have the flexibility to pay as much or as little as you desire, as often as you’d like.
How Much Money Can I Get with 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.
