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.
For many seniors, their home is their biggest asset and the one they have invested the most money in during their lives. In fact, home equity now accounts for more than two-thirds of all wealth for the average senior American couple3.
Reverse mortgages work by letting homeowners tap into their house's equity while continuing to reside in their house well into their retirement years. More than 1.2 million American seniors have already made a HECM loan a component of their retirement plan4.
Reverse vs. Classic Mortgage
When it comes to reverse mortgages and traditional mortgages, you'll find many similarities and differences. While conventional mortgages require homeowners to make consistent payments on the loan balance every month for several years, HECM loans do not require homeowners to make any monthly mortgage payments1.
Similarities:
- The owner is responsible for property taxes, maintenance, and insurance.
- The owner keeps title and ownership of the home.
- Loans are secured by deeds and notes.
- Closing costs for a reverse mortgage are comparable to those for a traditional (forward) mortgage.
Differences:
- The line of credit for a HECM loan will never be reduced; it is guaranteed to grow over time, regardless of loan balance or your home's value.
- HECM loans do not require monthly loan payments to be made1.
- The borrower will never be required to pay back more than their home is worth (non-recourse loan) and they pay a moderate FHA insurance premium to gain these loan features.
- Only 1 borrower must be 62 years of age or older to apply for a reverse mortgage!
Per the Federal Housing Administration (FHA) guidelines, there are more elements regarding how a reverse mortgage works.
Homeowners are required to use the house as their primary residence while keeping the house in good condition. Borrowers taking out a HECM loan must also receive third-party FHA-approved counseling as part of the loan process.
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.
Can I Eliminate Monthly Mortgage Payments?
Yes. If there’s a conventional mortgage on your home, the cash from the HECM loan is first used to pay off that loan. As no monthly mortgage payments are required on the HECM1, you'll be able to eliminate that monthly bill and keep more money to use as you see fit.
One of the main benefits of reverse mortgages is that repayment is deferred. This means that repayment of the loan is not due until after the final borrower no longer lives in the home. The decision is yours on whether or not you would like to repay the loan in advance. There are no early payment penalties with a reverse mortgage. And with voluntary mortgage payments1, you have the freedom to pay as much or as little as you desire, as regularly as you would like.
How Much Money Can I Get with 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.
