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.
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.
