Reverse mortgages are specially designed loans for homeowners aged 62 and above. Also named a Home Equity Conversion Mortgage (HECM), this type of mortgage has been overseen by the Federal Housing Administration since 1988.
According to the Federal Trade Commission (FTC), this type of loan works by allowing homeowners to convert a percentage of their home’s equity into cash without having to sell the house or make regular monthly payments1.
Unlike your standard forward mortgage, where the homeowner must begin paying down the loan right away, borrowers do not need to pay off money collected from a reverse mortgage until after the last borrower stops living in the house2. Monthly loan payments are not required1.
For many retirees, their house is their largest asset, and the one they have invested the most money in during their lives. In fact, equity in homes now accounts for more than 66% of all net worth for an average retired American couple3.
HECM loans work by letting homeowners access their house's equity while continuing to reside there well into the retirement years. More than 1.2 million American seniors have already made a HECM loan part of their retirement plan4.
HECM vs. Traditional Mortgage
When comparing reverse mortgages and traditional mortgages, there are many differences and similarities. While traditional mortgages require homeowners to make scheduled payments on their mortgage balance monthly for several years, HECM loans don't require borrowers to make any monthly mortgage payments1.
Differences:
- Reverse mortgages do not require monthly loan payments to be made1.
- Borrowers will never be required to pay back more than the home is worth (non-recourse loan) and they pay a moderate FHA insurance premium to gain this protection.
- The borrower is required to be at least 62 years old to qualify for a Home Equity Conversion Mortgage.
- The line of credit for a Home Equity Conversion Mortgage can never be reduced; it is guaranteed to increase over the life of the loan, regardless of the balance or home value.
Similarities:
- The homeowner maintains the deed and ownership of the home.
- Closing costs for a HECM are similar to those for a traditional (forward) mortgage.
- The homeowner is responsible for insurance, property taxes, and maintenance.
- Both mortgages are secured by deeds and notes.
According to the Federal Housing Administration (FHA) rules, there are additional factors regarding how a Home Equity Conversion Mortgage works.
Homeowners need to use the home as their main residence while keeping the house in satisfactory condition. Homeowners taking out a reverse mortgage must also attend third-party FHA-approved counseling prior to closing.
How Can HECM Cash Be Used?
The proceeds you get from a reverse mortgage can be used for anything you wish. We provide several distribution methods for receiving proceeds and how you choose to use your cash depends on your personal financial situation and retirement goals. If you have a current mortgage on the home, the funds from the reverse mortgage are first used to pay off the loan. The remaining cash can be received in any of the following distribution methods:
- 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 or when you need it.
- Any combination of these methods.
Every homeowner is different, and our clients have discovered creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. These are just a few examples of how Home Equity Conversion Mortgages can work to your benefit:
- Make updates, repairs, or modifications to your home to help you live more comfortably.
- Lower your taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the cash with income tax-free reverse mortgage funds5.
- Have a credit line for occasional expenses or emergencies.
- Help a grandchild or child with major expenses, like a down payment on a home or college tuition.
- Have extra money on hand to pay for everyday bills and expenses.
- Eliminate or reduce debt or credit card balances.
- Help with healthcare expenses, making "aging in place" easier.
- Save cash to help pay for long-term care down the road.
Can My Children Keep my Home?
Yes. One of the benefits of HECM loans is that your children have the option to get alternative financing, repay the reverse mortgage, and keep the house. However, the funds to repay the reverse mortgage typically come from the sale of the home itself, once the home passes to your children.
In the unlikely event that the amount of the HECM loan repayment is more than the value of the home, neither your heirs nor you will be obligated to repay the difference. Insurance from the FHA is a component of every HECM, so it would cover any shortfall.
Can I Eliminate Monthly Mortgage Payments?
Yes. If there’s an existing mortgage on your house, the money from the reverse mortgage is first used to repay that loan. Since no monthly mortgage payments are needed on the HECM1, you can be done with that monthly bill and keep more cash to use as you see fit.
One of the strongest features of Home Equity Conversion Mortgages 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 as to whether or not you want to repay the reverse mortgage ahead of time. There are no early payment penalties with the HECM loan. And with discretionary mortgage payments1, you can enjoy the flexibility to pay as little or as much as you want, 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.
