According to the Federal Trade Commission (FTC), reverse mortgages work by allowing homeowners to turn part of their home’s equity into cash without having to sell their house or make regular monthly payments1.
Unlike your traditional forward mortgage, where the homeowner begins repaying the loan immediately, homeowners do not have to repay money received through a reverse mortgage until after the last borrower stops living in the home2. Monthly loan payments are not required1.
How Can HECM Proceeds Be Used?
The money you receive from a Home Equity Conversion Mortgage can be used in any way you wish. Longbridge has many distribution methods for receiving your money and how you use the funds depends completely on your personal financial situation and retirement goals. If there is an existing mortgage on your home, the funds from the reverse mortgage will first be used to repay the loan. The remaining proceeds can be taken in any of the following distribution methods:
- A single payment, income tax-free.5
- Steady, tax-free monthly payments.5
- A line of credit, as a “safety net” for later use if needed.
- A combination of these methods.
Each borrower is unique, and our clients have found creative ways to use a HECM loan to improve their incomes, lifestyles, and monthly cash flow. These are a few quick illustrations of how HECM loans can work to your advantage:
- Have additional money on hand to pay for everyday expenses and bills.
- Eliminate or reduce credit card balances or other debts.
- Help with healthcare expenses, making it easier to “age in place.”
- Set aside money to assist in paying for long-term care down the road.
- Make repairs, updates, or improvements to your home to help you live more comfortably.
- Decrease your taxable income: prevent having to make taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the cash with income tax-free reverse mortgage funds5.
- Have a credit line for occasional expenses or emergencies.
- Assist a grandchild or child with life expenses, like college tuition or a down payment on a home.
Will My Heirs Keep the House?
Yes. One of the benefits of reverse mortgages is that your children have the option to arrange their own financing, pay off the HECM, and keep the home. However, the funds to repay the reverse mortgage usually come from the sale of the house itself after the house passes to your heirs.
In the rare event that the amount of the HECM loan repayment is more than the house 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 pay any shortfall.
