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.
For many seniors, their home is their biggest asset and the one which they have invested the most money in throughout their lives. In fact, home equity now accounts for more than 66% of all net worth for an average retired American couple3.
In California, reverse mortgages work by allowing homeowners to tap into their home’s equity while still residing there well into their retirement years. More than 1.2 million American seniors have already made a reverse mortgage part of their retirement plan4.
Reverse Mortgage vs. Traditional Mortgage
When comparing traditional and reverse mortgages, there are many similarities and differences. While conventional mortgages require borrowers to make regular payments on the loan balance monthly for many years, HECM loans don't require borrowers to make any monthly loan payments1.
Similarities:
- Both mortgages are secured by deeds and notes.
- Closing costs for a HECM are similar to those for a traditional (forward) mortgage.
- The homeowner keeps the title and ownership of the house.
- The owner is responsible for property taxes, maintenance, and insurance.
Differences:
- Borrowers must be 62 years of age or older to apply for a Home Equity Conversion Mortgage.
- Borrowers will never be required to repay more than the house is worth (non-recourse loan) and they pay a small FHA insurance premium to gain this protection.
- HECM loans do not require monthly mortgage payments to be made.
- Your credit line for a HECM loan can never be lowered; it is guaranteed to grow over the life of the loan, regardless of the balance or home value.
According to the Federal Housing Administration (FHA) rules, there are more aspects regarding how a HECM loan works.
Borrowers must use the house as their primary residence while maintaining the house in satisfactory condition. Borrowers taking out a reverse mortgage are also required to receive independent FHA-approved counseling as part of the loan process.
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.
Can I get rid of monthly mortgage payments?
Yes. If there’s a conventional mortgage on your home, the money from the Home Equity Conversion Mortgage is initially used to pay off that loan. As no monthly mortgage payments are required on the HECM1, you can eliminate that monthly expense and keep more income to use as you desire.
One of the main benefits of HECM loans is that repayment is delayed. This means that the loan repayment is not due until after the final borrower no longer resides within the home. The decision is yours on whether or not you would like to pay off the loan in advance. There are no early payment penalties with the Home Equity Conversion Mortgage. And with elective mortgage payments1, you can enjoy the flexibility to pay as much or as little as you would like, as regularly as you’d like.
How much money can I receive from a Reverse Mortgage?
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.
