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.
For most retirees, their house is their biggest asset and the one which they have invested the most money in during their lives. In fact, home equity now represents more than two-thirds of total net worth for an average senior couple in America3.
In Washington state, reverse mortgages work by letting homeowners tap into their home’s equity while still living in the home well into their retirement years. More than 1.2 million Americans have already made a HECM loan a component of their retirement plan4.
Reverse vs. Forward Mortgage
In comparing reverse mortgages and traditional mortgages, you'll find several differences and similarities. While traditional mortgages require borrowers to make scheduled payments on their mortgage balance every month for several years, HECM loans do not require homeowners to make any monthly mortgage payments1.
- The line of credit for a Home Equity Conversion Mortgage can never be lowered; it is guaranteed to increase over the life of the loan, regardless of the balance or your home's value.
- Reverse mortgages do not require monthly loan payments to be made1.
- The borrower will never be asked to pay back more than their house is worth (non-recourse loan) and they pay a moderate FHA insurance premium for these benefits.
- Borrowers are required to be at least 62 years old to apply for a Home Equity Conversion Mortgage.
- The owner retains deed and ownership of the house.
- Closing costs for a HECM are comparable to those for a traditional (forward) mortgage.
- The owner is responsible for maintenance, property taxes, and insurance.
- Both mortgages are secured by notes and deeds.
According to the Federal Housing Administration (FHA) regulations, there are more guidelines regarding how a HECM loan works.
Borrowers must use the house as their primary residence while keeping the house in good condition. Borrowers taking out a Home Equity Conversion Mortgage must also partake in third-party FHA-approved counseling as part of the loan process.
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.
Can I get rid of monthly mortgage payments?
Yes. If you have a traditional 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 needed 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 features of reverse mortgages 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 choice is yours on whether or not you want to pay off the loan in advance. You will have no prepayment penalties with your reverse mortgage. And with optional mortgage payments1, you can enjoy the freedom to pay as little or as much as you would like, as often as you’d like.
How much money can I get with a HECM loan?
There are multiple factors that go into determining how much of your home’s equity you can convert into cash with a HECM loan. Age, current interest rates, and your home's appraised value are all reviewed. Typically, the amount of cash you can qualify for will be between 50% and 70% of your house’s value. The fastest way to get a quote is to use our HECM calculator. This is a complimentary, no-obligation tool that offers a fast and accurate quote in minutes.
- Real estate taxes, homeowners’ insurance, and property maintenance required.
The loan balance increases over time as interest on the loan and fees accumulate.
Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.