Also known as a Home Equity Conversion Mortgage (HECM), this loan program has been overseen by the Federal Housing Administration since 1988.
According to the Federal Trade Commission (FTC), reverse mortgages work by letting homeowners turn a portion of their house's equity into cash without having to sell their house or make regular monthly mortgage payments. Dissimilar from a classic forward mortgage, where the homeowner must begin repaying the mortgage immediately, borrowers do not have to pay off money received from a reverse mortgage until after the last borrower no longer lives in the home. Monthly mortgage payments are not required1.
How Can Reverse Mortgage Funds Be Used?
The proceeds you receive from a reverse mortgage can be utilized for anything you wish. We provide several ways for receiving funds and how you use your cash depends on your retirement goals and personal financial situation. If you have an existing mortgage on your house, the funds from the HECM loan will first be used to pay off the balance. The remaining money can be received in any of the following ways:
- A one-time payment, income tax-free.4
- Consistent, tax-free monthly payments.4
- A line of credit, as a “safety net” for later use if and when you need it.
- Any combination of these.
Every borrower is different, and our customers have found creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are just a few examples of how reverse mortgages can work to your benefit:
- Have more cash available to pay for regular bills and expenses.
- Eliminate or reduce debt or credit card balances.
- Assist with healthcare expenses, making it easier to “age in place.”
- Save funds to help pay for long-term care down the road.
- Make repairs, updates, or improvements to your house to live more comfortably.
- Lower your taxable income: prevent having to make taxable withdrawals from 401(k) or other retirement plans by replacing the cash with income tax-free HECM funds4.
- Create a credit line for occasional expenses or emergencies.
- Help a family member with large expenses, such as college tuition or a down payment on a home.
Will My Children Keep my Home?
Yes. One of the positives of HECM loans is that your heirs have the option to arrange their own financing, pay off the reverse mortgage and keep the house. However, the money to repay the reverse mortgage usually comes from the sale of the home itself, once the house passes to your heirs.
In the unlikely event that the total amount of the reverse mortgage repayment is more than the house is worth, neither your heirs nor you would be obligated to repay the difference. FHA insurance is a part of every HECM, so that would cover any shortfall.
