Per the Federal Trade Commission (FTC), this type of loan works by letting homeowners convert a percentage of their home’s equity into cash without having to sell their home or make regular monthly payments1.
Unlike a standard forward mortgage, where the homeowner begins repaying the mortgage right away, homeowners do not need to repay funds received from a HECM until after the last borrower stops living in the house2. Monthly loan payments are not required1.
For most seniors in Bakersfield, their house is their biggest asset and the one which they have invested the most in during their lives. In fact, equity in homes now accounts for more than two-thirds of all wealth for the average retired couple in America3.
HECM loans work by allowing homeowners to access their house's equity while still living in their house well into their retirement years. More than 1.2 million American seniors have already made a HECM loan an important part of their retirement plan4.
Reverse Mortgage vs. Conventional Mortgage
When it comes to reverse mortgages and traditional mortgages, you'll find many similarities and differences. While traditional mortgages require borrowers to make regular payments toward their loan balance every month for many years, HECM loans do not require homeowners to make any monthly loan payments1.
Similarities:
- The owner retains title and ownership of the home.
- The homeowner is responsible for maintenance, property taxes, and insurance.
- Both mortgages are secured by notes and deeds.
- Closing costs for a HECM are comparable to those for a classic (forward) mortgage.
Differences:
- Reverse mortgages do not require monthly mortgage payments to be made1.
- The credit line for a HECM loan will never be lowered; it is guaranteed to increase over time, regardless of the balance or home value.
- The borrower will never be required to repay more than their home is worth (non-recourse loan) and they pay a modest FHA insurance premium for these benefits.
- Borrowers must be 62 years of age or older to apply for a HECM loan.
According to the Federal Housing Administration (FHA) guidelines, there are additional aspects regarding how a HECM loan works.
Borrowers need to use the home as their main residence while maintaining the house in good condition. Borrowers receiving a Home Equity Conversion Mortgage are also required to attend independent FHA-approved counseling as part of the loan process.
How Can You Use Reverse Mortgage Proceeds?
The cash you receive from a HECM loan can be used in any way you want. Longbridge has many ways for receiving funds and how you use your cash depends on your personal financial situation and retirement goals. If you have a current mortgage or lien on the home, the cash from the Home Equity Conversion Mortgage is first used to pay off the loan. The remaining proceeds can be taken in any of the following distribution methods:
- A single payment, income tax-free5.
- Consistent, tax-free monthly payments5.
- A credit line, as a “safety net” for later use if needed.
- Any combination of these.
Each borrower is different, and our customers have discovered creative ways to use a reverse mortgage to improve their incomes, lifestyles, and monthly cash flow. These are a few quick examples of how Home Equity Conversion Mortgages work to your benefit:
- Keep more funds on hand to pay for regular expenses and bills.
- Eliminate or reduce debt or credit card balances.
- Assist with medical expenses, making "aging in place" easier.
- Save cash to help pay for long-term care down the road.
- Make repairs, updates, or improvements to your home to live more comfortably.
- Decrease your total 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.
- Create a line of credit for occasional expenses or emergencies.
- Support a family member with major expenses, like college tuition or a down payment on a home.
Will My Children Keep my House?
Yes. One of the positives of HECM loans in California is that your heirs have the option to get their own financing, repay the reverse mortgage, and keep the Bakersfield home. However, the funds to repay the reverse mortgage usually come from the sale of the home itself after the home passes to your heirs.
In the unlikely event that the total amount of the loan repayment is more than the home is worth, neither you nor your heirs would be obligated to repay the difference. Insurance from the FHA is a component of every HECM, so that would pay any shortfall.
Can I Eliminate Monthly Mortgage Payments?
Yes. If there’s a forward mortgage on your home, the funds from the Home Equity Conversion Mortgage are first used to pay off that loan. As no monthly mortgage payments are required on the HECM1, you'll be able to get rid of that monthly bill and keep more cash to use as you see fit.
One of the main features of reverse mortgages is that repayment is deferred. 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 want to repay the HECM ahead of time. You will have no prepayment penalties with a reverse mortgage. And with optional mortgage payments1, you have the flexibility to pay as little or as much as you would like, as regularly as you’d like.
How Much Cash 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.
