According to the Federal Trade Commission (FTC), reverse mortgages work by letting homeowners turn part of their home’s equity into cash without having to sell their house or make regular monthly mortgage payments1.
Dissimilar from a traditional forward mortgage where the borrower must begin repaying the mortgage right away, borrowers do not have to repay funds collected through a reverse mortgage until after the final borrower stops living in the house2. There are no monthly mortgage payments required1.
How can you use HECM funds?
The cash you get from a Home Equity Conversion Mortgage can be utilized for anything you wish. There are many methods of receiving funds and how you decide to use these proceeds depends completely on your retirement goals and personal financial situation. If there is a current mortgage or lien on the house in Gig Harbor, the proceeds from the reverse mortgage are first used to pay off the balance. The remaining money can then be received in any of the following ways:
- A one-time payment, income tax-free. 5
- A credit line, as a “safety net” for future use if needed.
- Steady, tax-free monthly payments. 5
- A combination of these methods.
Each homeowner is different, and our clients have discovered creative ways to use a reverse mortgage to improve their incomes, lifestyles, and monthly cash flow. Here are a few quick examples of how a reverse mortgage can work to your advantage:
- Keep additional money available to cover everyday expenses and bills.
- Lower your taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the money with income tax-free HECM funds5.
- Eliminate or reduce debt or credit card balances.
- Assist with medical expenses, making "aging in place" easier.
- Support a grandchild or child with life expenses, like a down payment on a home or college tuition.
- Save money to assist in paying for long-term care down the road.
- Make updates, repairs, or modifications to your house to help you live more comfortably.
- Create a credit line for emergencies or occasional expenses.
Can my heirs keep my home?
Yes. One of the benefits of reverse mortgages is that your heirs are provided the option to get their own financing, repay the HECM, and keep the house in Gig Harbor. However, the funds to pay off the reverse mortgage typically come from the sale of the house itself after the house passes to your children.
In the rare event that the amount of the HECM loan repayment is more than the home is worth, neither your heirs nor you would be required to repay the difference. FHA insurance is a component of every HECM, so it would make up for any shortfall.
