According to the Federal Trade Commission (FTC), HECM loans work by allowing homeowners to convert a portion of their house's equity into cash without the need to sell the house or make regular monthly mortgage payments1.
Dissimilar from a traditional forward mortgage, where the homeowner begins repaying the mortgage right away, borrowers do not need to pay off funds collected through a HECM until after the last borrower stops living in the house2. There are no monthly loan payments required1.
For most seniors in Nipomo, their home is their biggest asset and the one they have invested the most in during their lives. In fact, home equity now accounts for more than two-thirds of total wealth for an average retired American couple3.
Reverse mortgages work by allowing homeowners to tap into their house's equity while still residing in their house well into their retirement years. Over 1.2 million American seniors have already made a HECM loan a powerful part of their retirement plan4.
HECM vs. Traditional Mortgage
When comparing traditional and reverse mortgages, you'll find several differences and similarities. Where typical mortgages require homeowners to make consistent payments on their mortgage balance every month for many years, reverse mortgages do not require homeowners to make any monthly mortgage payments1.
Similarities:
- The owner keeps title and ownership of the home.
- The homeowner is responsible for maintenance, property taxes, and insurance.
- Both mortgages are secured by deeds and notes.
- Closing costs for a HECM are comparable to those for a traditional (forward) mortgage.
Differences:
- Reverse mortgages do not require monthly mortgage payments to be made1.
- The credit line for a HECM loan can never be reduced; it is guaranteed to grow over the life of the loan, regardless of the balance or home value.
- The borrower will never be asked to repay more than the house 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 in order to qualify for a Home Equity Conversion Mortgage.
Per the Federal Housing Administration (FHA) regulations, there are additional factors regarding how a Home Equity Conversion Mortgage works.
Homeowners are required to use the house as their main residence while maintaining the home in satisfactory condition. Borrowers taking out a HECM loan must also receive independent FHA-approved counseling as part of the loan process.
How Can Reverse Mortgage Proceeds Be Used?
The money you receive from a reverse mortgage can be utilized in any way you wish. We offer many distribution methods for receiving funds and how you decide to use your cash depends completely on your retirement goals and personal financial situation. If you have a current mortgage or lien on the house in Nipomo, the proceeds from the reverse mortgage will first be used to repay the balance. The remaining money 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 needed.
- Any combination of these.
Every homeowner is unique, and our customers have discovered creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are a few quick examples of how HECM loans can work to your benefit:
- Have extra money on hand to cover regular expenses and bills.
- Reduce or eliminate debt or credit card balances.
- Help with medical costs, making it easier to “age in place.”
- Set aside money to help pay for long-term care down the road.
- Make updates, repairs, or modifications to your house to 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 HECM funds5.
- Have a credit line for occasional expenses or emergencies.
- Help a grandchild or child with large expenses, such as college tuition or a down payment on a home.
Can My Heirs Keep the House?
Yes. One of the benefits of reverse mortgages is that your children are provided the option to arrange their own financing, repay the reverse mortgage, and keep the home in Nipomo. However, the funds to pay off the reverse mortgage typically come from the sale of the house itself once the house passes to your heirs.
In the unlikely event that the amount of the HECM loan repayment is more than the value of the house, neither your heirs nor you would be responsible for repaying the difference. FHA insurance is a part of every HECM, so it would pay any shortfall.
Can I Get Rid of Monthly Mortgage Payments?
Yes. If there’s a traditional mortgage on your home, the cash from the reverse mortgage is initially used to repay that loan. Since no monthly mortgage payments are required on the HECM1, you'll be able to eliminate that monthly bill and free up more cash to use as you desire.
One of the main features of reverse mortgages is that repayment is delayed. This means that repayment of the loan is not due until after the final borrower no longer resides within the house. The choice is yours on whether or not you want to pay off the reverse mortgage in advance. There are no early payment penalties with the HECM loan. And with voluntary mortgage payments1, you can enjoy the freedom to pay as little or as much as you would like, as regularly as you’d like.
How Much Money Can I Get with 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.
