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.
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.
