Also named a Home Equity Conversion Mortgage (HECM), this program has been overseen by the FHA since 1988.
Per the Federal Trade Commission (FTC), this type of loan works by letting homeowners turn part of their house's equity into cash without having to sell their home or make regular monthly payments. Unlike your conventional forward mortgage, where the homeowner must begin repaying the mortgage immediately, homeowners do not have to repay money collected from a HECM until after the last borrower no longer lives in the home. There are no monthly mortgage payments required1.
For many retirees, their house is their largest asset and the one which they have invested the most money in during their lives. In fact, equity in homes now represents more than two-thirds of all net worth for an average retired couple in America2.
HECM loans work by letting homeowners access their house's equity while still residing there 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. Traditional Mortgage
When it comes to reverse mortgages and traditional mortgages, there are several differences and similarities. Where typical mortgages require borrowers to make consistent payments on the mortgage balance monthly for several years, HECM loans do not require homeowners to make any monthly loan payments1.
- The homeowner retains deed and ownership of the house.
- The homeowner is responsible for property taxes, maintenance, and insurance.
- Loans are secured by deeds and notes.
- Closing costs for a reverse mortgage are comparable to those for a classic (forward) mortgage.
- Reverse mortgages do not require monthly loan payments to be made.
- The line of credit for a HECM loan can never be lowered; it's guaranteed to grow over the life of the loan, regardless of the balance or your home's value.
- Borrowers will never be asked to repay more than the home is worth (non-recourse loan), and pays a moderate FHA insurance premium for this protection.
- The borrower are required to be 62 years of age or older to apply for a reverse mortgage.
Per the Federal Housing Administration (FHA) guidelines, there are a few other elements regarding how a HECM loan works.
Borrowers are required to use the house as their main residence while maintaining the home in good condition. Borrowers taking out a HECM loan must also partake in independent FHA-approved counseling prior to closing.
How Can You Use Reverse Mortgage Cash?
The money you get from a Home Equity Conversion Mortgage can be used in any way you want. We offer many ways for receiving funds and how you use your cash depends entirely on your retirement goals and personal financial situation. If you have an existing mortgage on your house, the funds from the reverse mortgage is first used to repay the balance. The remaining funds can be received in any of the following distribution methods:
- A single payment, income tax-free.4
- Consistent, tax-free monthly payments.4
- A line of credit, as a “safety net” for future use if needed.
- Any combination of these.
Every borrower is unique, and our clients have found creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. These are a few quick examples of how Home Equity Conversion Mortgages can work to your advantage:
- Have more funds available to cover everyday bills and expenses.
- Eliminate or reduce credit card balances or other debts.
- Help with medical expenses, making "aging in place" easier.
- Save funds to assist in paying for long-term care down the road.
- Make updates, repairs, or modifications to your home to live more comfortably.
- Lower your total taxable income: avoid making taxable withdrawals from IRA, 401(k), or other retirement plans by replacing the funds with income tax-free HECM funds4.
- Establish a credit line for occasional expenses or emergencies.
- Support a grandchild or child with large expenses, like a down payment on a home or college tuition.
Can My Heirs Keep my House?
Yes. One of the benefits of Home Equity Conversion Mortgages is that your heirs are provided the option to get their own financing, repay the HECM, and keep the home. However, the funds to pay off the reverse mortgage typically comes from the sale of the home itself, once the house passes to your heirs.
In the unlikely event that the total amount of the HECM loan repayment is more than the home is worth, neither your heirs nor you will be responsible for repaying the difference. Insurance from the FHA is a component of every HECM, so it would make up for any shortfall.
Can I Eliminate Monthly Mortgage Payments?
Yes. If you have a conventional mortgage on your home, the funds from the HECM loan are first used to pay off that loan. Since no monthly mortgage payments are required on the HECM1, you'll be able to eliminate that monthly expense and keep more cash to use as you need.
One of the main benefits of reverse mortgages is that repayment is deferred. This means that the loan repayment is not due until after the final borrower no longer resides within the home. The decision is yours as to whether or not you want to repay the reverse mortgage ahead of time. There are no prepayment penalties with a HECM loan. And with optional mortgage payments1, you can enjoy the freedom to pay as much or as little as you would like, as often as you’d like.
How Much Cash Can I Get with a HECM Loan?
There are multiple elements that go into calculating how much of your house’s equity you can convert into cash with a HECM loan. Age, current interest rates, and your home's appraised value are all taken into consideration. Typically, the amount of cash you can get qualified for will be between 50% and 70% of your house’s value. The fastest way to get a quote is to use our reverse mortgage quote calculator. It is a free, no-obligation tool that provides an accurate and fast 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.