Also known as a Home Equity Conversion Mortgage (HECM), this type of loan has been overseen by the FHA since 1988.
Per the Federal Trade Commission (FTC), HECM loans work by letting homeowners turn a percent of their home\u2019s equity into cash without having to sell their house or make regular monthly payments. Dissimilar from a standard forward mortgage, where the homeowner begins repaying the loan immediately, borrowers do not have to repay funds collected through a reverse mortgage until after the final borrower stops living in the house. Monthly loan payments are not required1.
For many seniors, their house is their biggest asset, and the one they have invested the most in throughout their lives. In fact, equity in homes now accounts for more than 66% of total wealth for the average senior couple in America2.
Reverse mortgages work by letting homeowners tap into their home\u2019s equity while continuing to reside in the home well into their retirement years. Over 1.2 million American seniors have already made a reverse mortgage an important part of their retirement plan3.
HECM vs. Conventional Mortgage
When it comes to traditional and reverse mortgages, there are many differences and similarities. While conventional mortgages require homeowners to make regular payments toward their loan balance every month for many years, reverse mortgages do not require homeowners to make any monthly mortgage payments1.
How They Are Similar:
- The owner keeps title and ownership of the home.
- The homeowner is responsible for insurance, maintenance, and property taxes.
- Loans are secured by notes and deeds.
- Closing costs for a reverse mortgage are similar to those for a traditional (forward) mortgage.
How They Are Different:
- Reverse mortgages don't require monthly mortgage payments to be made.
- The line of credit for a Home Equity Conversion Mortgage can never be reduced; it's guaranteed to increase over the life of the loan, regardless of the balance or home value.
- Borrowers will never be required to repay more than the house is worth (non-recourse loan), and pays a small FHA insurance premium to gain this protection.
- Borrowers must be at least 62 years old in order to apply for a reverse mortgage.
Per the Federal Housing Administration (FHA) guidelines, there are a few other elements regarding how a reverse mortgage works.
Borrowers are required to use the house as their main residence while maintaining the home in satisfactory condition. Homeowners applying for a reverse mortgage must also partake in third-party FHA-approved counseling prior to the closing of the loan.
How Can Reverse Mortgage Proceeds Be Used?
The cash you receive from a reverse mortgage can be used in any way you wish. Longbridge has several methods for receiving your money and how you choose to use your cash depends on your retirement goals and personal financial situation. If there is a current mortgage on the house, the money from the Home Equity Conversion Mortgage is first used to pay off the balance. The remaining proceeds can be taken in any of the following ways:
- A single payment, income tax-free.4
- Consistent, tax-free monthly payments.4
- A line of credit, as a \u201csafety net\u201d for future use if needed.
- Any combination of these.
Each borrower is unique, and our clients have found creative ways to use a reverse mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are a few quick examples of how HECM loans can work to your advantage:
- Keep more funds on hand to pay for everyday expenses and bills.
- Reduce or eliminate credit card balances or other debts.
- Help with healthcare expenses, making "aging in place" easier.
- Set aside money to assist in paying for long-term care in the future.
- Make modifications, improvements, or repairs to your home to help you live more comfortably.
- Decrease your total taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the money with income tax-free HECM funds4.
- Create a line of credit for occasional expenses or emergencies.
- Support a grandchild or child with major expenses, such as college tuition or a down payment on a home.
Can My Heirs Keep my House?
Yes. One of the positives of HECM loans is that your heirs have the option to get their own financing, pay off the reverse mortgage and keep the home. However, the money to pay off the reverse mortgage typically comes from the sale of the home itself, after the home passes to your heirs.
In the rare event that the amount of the HECM loan repayment is more than the value of the house, neither you nor your heirs would be required to repay the difference. FHA insurance is a part of every HECM, so that would pay any shortfall.
Can I Eliminate Monthly Mortgage Payments?
Yes. If there\u2019s a conventional mortgage on your house, the cash from the reverse mortgage is first used to repay that loan. As no monthly mortgage payments are needed on the HECM1, you'll be able to eliminate that monthly bill and keep more income to use as you see fit.
One of the biggest features of HECM loans is that repayment is delayed. This means that the loan repayment is not due until after the final borrower no longer resides within the house. The decision is yours on whether or not you want to pay off the HECM in advance. There are no prepayment penalties with your reverse mortgage. And with voluntary mortgage payments1, you have the flexibility to pay as much or as little as you desire, as often as you\u2019d like.
How Much Cash Can I Receive from a Reverse Mortgage?
There are many elements that go into determining how much of your house\u2019s 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\u2019s value. Contact me to get your free, no-obligation, personalized quote.
