Per the Federal Trade Commission (FTC), HECM loans work by letting homeowners turn part of their house's equity into cash without having to sell their home or make regular monthly mortgage payments1.
Unlike a standard forward mortgage, where the homeowner begins paying down the mortgage immediately, homeowners do not have to repay money collected through a HECM until after the last borrower no longer lives in the house2. Monthly mortgage payments are not required1.
How Can HECM Funds Be Used?
The funds you get from a reverse mortgage can be utilized in any way you want. There are several methods of receiving your money and how you decide to use this money depends entirely on your retirement goals and personal financial situation. If there is a current mortgage on the home, the cash from the reverse mortgage is first used to repay the balance. The remaining money can then be taken in any of the following ways:
- A one-time payment, income tax-free.5
- Consistent, tax-free monthly payments.5
- A credit line, as a “safety net” for future use when or if you need it.
- Any combination of these methods.
Each homeowner is different, and our customers have found creative ways to use a HECM loan to improve their incomes, lifestyles, and monthly cash flow. These are a few quick examples of how reverse mortgages can work to your advantage:
- Have a line of credit for occasional expenses or emergencies.
- Set aside cash to assist in paying for long-term care in the years ahead.
- Support a family member with large expenses, such as a down payment on a home or college tuition.
- Keep more funds on hand to pay for everyday expenses and bills.
- Reduce or eliminate debt or credit card balances.
- Assist with medical bills, making "aging in place" easier.
- Make updates, repairs, or modifications to your house to live more comfortably.
- Decrease your total taxable income: avoid making taxable withdrawals from 401(k) or other retirement plans by replacing the money with income tax-free reverse mortgage funds5.
Can My Children Keep my House?
Yes. One of the positives of Home Equity Conversion Mortgages is that your heirs have the option to get their own financing, repay the reverse mortgage, and keep the house. However, the funds to pay off the reverse mortgage usually come from the sale of the house itself, after the home passes to your heirs.
In the rare event that the total amount of the HECM loan repayment is more than the house is worth, neither your heirs nor you will be responsible for repaying the difference. FHA insurance is a part of every Home Equity Conversion Mortgage, so that would cover any shortfall.
