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.
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.
