Per the Federal Trade Commission (FTC), reverse mortgages work by allowing homeowners to convert a percentage of their home’s equity into cash without having to sell their house or make regular monthly payments1.
Dissimilar from a typical forward mortgage where the homeowner must begin paying down the loan immediately, homeowners do not have to repay funds received through a reverse mortgage until after the final borrower no longer lives in the house2. There are no monthly loan payments required1.
How can Reverse Mortgage funds be used?
The funds you get from a Home Equity Conversion Mortgage can be utilized in any way you wish. Longbridge has several distribution methods for receiving proceeds and how you use this money depends on your retirement goals and personal financial situation. If there is an existing mortgage on your Bakersfield home, the cash from the HECM loan is first used to repay that loan. The remaining money can then be taken in any of the following distribution methods:
- A line of credit, as a “safety net” for future use if you need it.
- A single payment, income tax-free. 5
- Consistent, tax-free monthly payments. 5
- Any combination of these methods.
Each homeowner is different, and our clients have discovered creative ways to use a reverse mortgage to improve their monthly cash flow, lifestyles, and incomes. Here are just a few illustrations of how Home Equity Conversion Mortgages can work to your benefit:
- Create a line of credit for occasional expenses or emergencies.
- Eliminate or reduce debt or credit card balances.
- Have extra cash on hand to pay for regular bills and expenses.
- Help with healthcare costs, making "aging in place" easier.
- Lower your taxable income: avoid making taxable withdrawals from 401(k) or other retirement plans by replacing the money with income tax-free reverse mortgage funds5.
- Make modifications, improvements, or repairs to your house to help you live more comfortably.
- Set aside cash to help pay for long-term care if needed.
- Support a child or grandchild with large expenses, such as a down payment on a home or college tuition.
Can my heirs keep my home?
Yes. One of the benefits of Home Equity Conversion Mortgages is that your heirs have the option to arrange their own financing, pay off the reverse mortgage, and keep the Bakersfield house. However, the funds to repay the HECM loan usually come from the sale of the house itself after the home passes to your children.
In the rare event that the amount of the reverse mortgage repayment is more than the home is worth, neither you nor your heirs will be obligated to repay the difference. Insurance from the FHA is a component of every Home Equity Conversion Mortgage, so it would cover any shortfall.
