Per the Federal Trade Commission (FTC), HECM loans work by allowing homeowners to turn part of their house’s equity into cash without the need to sell their home or make regular monthly mortgage payments1.
Unlike a classic forward mortgage where the homeowner begins repaying the mortgage right away, homeowners do not have to pay off funds collected through a HECM until after the final borrower no longer lives in the house2. There are no monthly loan payments required1.
For many seniors, their home is their largest asset and the one which they have invested the most in during their lives. In fact, equity in homes now represents more than two-thirds of all wealth for an average senior couple in America3.
Reverse mortgages work by allowing homeowners to tap into their home’s equity while still living there well into their retirement years. Over 1.2 million Americans have already made a reverse mortgage a powerful part of their retirement plan4.
HECM vs. Traditional Mortgage
In comparing reverse mortgages and traditional mortgages, you'll find several similarities and differences. While classic mortgages require borrowers to make consistent payments on their mortgage balance every month for several years, HECM loans don't require borrowers to make any monthly loan payments1.
Similarities:
- The owner keeps deed and ownership of the house.
- Loans are secured by deeds and notes.
- Closing costs for a HECM are comparable to those for a conventional (forward) mortgage.
- The owner is responsible for insurance, maintenance, and property taxes.
Differences:
- Reverse mortgages don't require monthly loan payments to be made1.
- Borrowers must be at least 62 years old to apply for a Home Equity Conversion Mortgage.
- The line of credit for a HECM loan will never be reduced; it is guaranteed to grow over time, regardless of the balance or home value.
- Borrowers will never be asked to repay more than the house is worth (non-recourse loan) and they pay a modest FHA insurance premium for these loan features.
According to the Federal Housing Administration (FHA) rules, there are additional factors regarding how a Home Equity Conversion Mortgage works.
Borrowers need to use the home as their main residence while keeping the home in good condition. Borrowers applying for a reverse mortgage are also required to attend independent FHA-approved counseling as part of the loan process.
How can Reverse Mortgage funds be used?
The money you get from a Home Equity Conversion Mortgage can be utilized for anything you like. We offer several distribution methods for receiving proceeds and how you decide to use these proceeds depends completely on your personal financial situation and retirement goals. If you have an existing mortgage on your home in Eloy, the proceeds from the Home Equity Conversion Mortgage are first used to repay the loan. The remaining proceeds can be received in any of the following distribution methods:
- Steady, tax-free monthly payments. 5
- A single payment, income tax-free. 5
- A line of credit, as a “safety net” for later use if needed.
- Any combination of these methods.
Every homeowner is unique, and our clients have discovered creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are just a few illustrations of how reverse mortgages can work to your advantage:
- Have additional funds on hand to cover everyday expenses and bills.
- Make modifications, improvements, or repairs 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 funds with income tax-free reverse mortgage funds5.
- Eliminate or reduce credit card balances or other debts.
- Help with medical expenses, making "aging in place" easier.
- Set aside cash to assist in paying for long-term care in the years ahead.
- Establish a credit line for occasional expenses or emergencies.
- Help a grandchild or child with life expenses, like a down payment on a home or college tuition.
Can my heirs keep the home?
Yes. One of the benefits of HECM loans is that your heirs are provided the option to arrange alternative financing, repay the HECM, and keep the Eloy house. However, the money to pay off the HECM loan typically comes from the sale of the house itself once the house passes to your children.
In the rare event that the total amount of the loan repayment is more than the home is worth, neither you nor your heirs would be required to repay the difference. FHA insurance is a component of every Home Equity Conversion Mortgage, so that would make up for any shortfall.
Can I get rid of monthly mortgage payments?
Yes. If there’s a classic mortgage on your house, the money from the reverse mortgage is first used to repay that loan. Since no monthly mortgage payments are needed on the HECM1, you can eliminate that monthly bill and keep more cash to use as you see fit.
One of the biggest benefits 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 resides within the house. The choice is yours on whether or not you would like to repay the loan in advance. You will have no prepayment penalties with the reverse mortgage. And with discretionary mortgage payments1, you have the freedom to pay as much or as little as you would like, as often 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.
