Per 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 the need to sell the house or make regular monthly mortgage payments1.
Unlike a typical forward mortgage, where the borrower begins paying down the loan immediately, homeowners do not have to pay off funds collected from a HECM until after the last borrower stops living in the home2. Monthly mortgage payments are not required1.
For many retirees in Northern California, their home is their most important asset, and the one which they have invested the most in throughout their lives. In fact, home equity now accounts for more than 66% of total wealth for the average senior couple in America3.
Reverse mortgages work by letting homeowners access their house's equity while still living there well into the retirement years. More than 1.2 million American seniors have already made a reverse mortgage a component of their retirement plan4.
Reverse vs. Traditional Mortgage
When it comes to traditional and reverse mortgages, there are several similarities and differences. While typical mortgages require homeowners to make scheduled payments on the loan balance monthly for several years, HECM loans don't require borrowers to make any monthly loan payments1.
Differences:
- Your credit line for a Home Equity Conversion Mortgage will never be reduced; it is guaranteed to grow over time, regardless of the balance or your home's value.
- Reverse mortgages don't require monthly mortgage payments to be made1.
- The borrower will never be asked to pay back more than the house is worth (non-recourse loan) and they pay a small FHA insurance premium for these loan features.
- Borrowers must be at least 62 years old to qualify for a Home Equity Conversion Mortgage.
Similarities:
- The owner retains deed and ownership of the house.
- The homeowner is responsible for property taxes, maintenance, and insurance.
- Both mortgages are secured by notes and deeds.
- Closing costs for a HECM are comparable to those for a classic (forward) mortgage.
Per the Federal Housing Administration (FHA) rules, there are a few other aspects regarding how a HECM loan works.
Homeowners need to use the house as their primary residence while maintaining the house in good condition. Homeowners applying for a HECM loan must also partake in third-party FHA-approved counseling as part of the loan process.
How Can You Use HECM Proceeds?
The proceeds you receive from a HECM loan can be used for anything you like. Longbridge has several distribution methods for receiving funds and how you decide to use this money depends completely on your personal financial situation and retirement goals. If there is an existing mortgage or lien on your Fairfield house, the proceeds from the reverse mortgage will first be used to pay off the balance. The remaining money can then be received in any of the following ways:
- A one-time payment, income tax-free.5
- Steady, tax-free monthly payments.5
- A line of credit, as a “safety net” for future use if needed.
- Any combination of these.
Every homeowner is different, and our customers have discovered creative ways to use a Home Equity Conversion Mortgage to improve their incomes, lifestyles, and monthly cash flow. Here are a few quick examples of how Home Equity Conversion Mortgages can work to your advantage:
- Keep extra money on hand to pay for everyday expenses and bills.
- Eliminate or reduce debt or credit card balances.
- Assist with medical costs, making "aging in place" easier.
- Save funds to assist in paying for long-term care down the road.
- Make repairs, updates, or improvements to your house to live more comfortably.
- Decrease your 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.
- Have a credit line for emergencies or occasional expenses.
- Help a family member with large expenses, such as college tuition or a down payment on a home.
Will My Children Keep my House?
Yes. One of the positives of HECM loans is that your children are provided the option to get alternative financing, pay off the loan, and keep the Fairfield home. However, the money to repay the reverse mortgage typically comes from the sale of the home itself, after the house passes to your heirs.
In the unlikely event that the total amount of the loan repayment is more than the home is worth, neither your heirs nor you will be required to repay the difference. Insurance from the FHA is a component of every Home Equity Conversion Mortgage, so it would pay any shortfall.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If there’s a conventional mortgage on your house, the funds from the reverse mortgage are first used to pay off that loan. Since no monthly mortgage payments are needed on the HECM1, you'll be able to eliminate that monthly bill and keep more money to use as you desire.
One of the strongest features of Home Equity Conversion Mortgages is that repayment is delayed. This means that the loan repayment is not due until after the final borrower no longer lives in the home. The decision is yours on whether or not you would like to pay off the reverse mortgage ahead of time. You will have no prepayment penalties with the Home Equity Conversion Mortgage. And with voluntary mortgage payments1, you can enjoy the freedom to pay as little or as much as you desire, as often as you would like.
How Much Money Can I Receive from 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.
