Per the Federal Trade Commission (FTC), HECM loans work by letting homeowners turn a percentage of their home’s equity into cash without the need to sell the house or make regular monthly payments1.
Unlike your typical forward mortgage where the borrower begins paying down the mortgage immediately, borrowers do not have to pay off funds received through a HECM until after the final borrower no longer lives in the home2. Monthly mortgage payments are not required1.
For many Americans, their house is their largest asset and the one they have invested the most money in during their lives. In fact, equity in homes now accounts for more than 66% of all wealth for an average retired couple in America3.
Reverse mortgages in California work by allowing homeowners to access their house's equity while continuing to reside in the home well into their retirement years. Over 1.2 million Americans have already made a HECM loan a component of their retirement plan4.
Reverse vs. Traditional Mortgage
In comparing reverse mortgages and traditional (forward) mortgages, you'll find many differences and similarities. While traditional mortgages require borrowers to make scheduled payments on their loan balance every month for many years, reverse mortgages don't require borrowers to make any monthly mortgage payments1.
Differences:
- The borrower will never be required to pay back more than their house is worth (non-recourse loan) and they pay a modest FHA insurance premium for these benefits.
- HECM loans do not require monthly loan payments to be made1.
- Your 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.
- The borrower must be 62 years of age or older to qualify for a HECM loan.
Similarities:
- The owner retains title and ownership of the home.
- Closing costs for a reverse mortgage are similar to those for a traditional mortgage.
- The homeowner is responsible for insurance, maintenance, and property taxes.
- Loans are secured by deeds and notes.
According to the Federal Housing Administration (FHA) guidelines, there are a few other aspects regarding how a Home Equity Conversion Mortgage works.
Homeowners are required to use the home as their main residence while keeping the home in good condition. Homeowners applying for a Home Equity Conversion Mortgage are also required to partake in third-party FHA-approved counseling as part of the loan process.
How can you use HECM proceeds?
The funds you receive from a reverse mortgage can be utilized for anything you want. We provide many distribution methods for receiving funds and how you use this money depends on your retirement goals and personal financial situation. If you have an existing mortgage or lien on the Oceanside house, the proceeds from the reverse mortgage are first used to pay off the loan. The remaining proceeds can then be received in any of the following ways:
- A line of credit, as a “safety net” for later use if needed.
- A single payment, income tax-free. 5
- Consistent, tax-free monthly payments. 5
- A combination of these methods.
Every homeowner is different, and our customers have discovered creative ways to use a Home Equity Conversion Mortgage to improve their lifestyles, incomes, and monthly cash flow. Here are just a few examples of how a Home Equity Conversion Mortgage could work to your benefit:
- Assist a child or grandchild with life expenses, like a down payment on a home or college tuition.
- Create a credit line for emergencies or occasional expenses.
- Eliminate or reduce credit card balances or other debts.
- Make updates, repairs, or modifications to your home to live more comfortably.
- Have additional money on hand to pay for everyday bills and expenses.
- Help with medical costs, making "aging in place" easier.
- Lower your total taxable income: prevent having to make taxable withdrawals from 401(k) or other retirement plans by replacing the cash with income tax-free HECM funds5.
- Set aside cash to assist in paying for long-term care in the years ahead.
Can my heirs keep my home?
Yes. One of the benefits of reverse mortgages is that your heirs have the option to arrange their own financing, repay the reverse mortgage, and keep the Oceanside house. However, the funds to pay off the HECM loan typically come from the sale of the house itself after the home passes to your children.
In the unlikely event that the total amount of the loan repayment is more than the value of the house, neither you nor your heirs would be obligated to repay the difference. FHA insurance is a component of every Home Equity Conversion Mortgage, so that would make up for any shortfall.
Can I get rid of monthly mortgage payments?
Yes. If you have a traditional mortgage on your house, the funds from the reverse mortgage are first used to repay that loan. As no monthly mortgage payments are needed on the HECM1, you can eliminate that monthly expense and keep more income to use as you desire.
One of the main features of reverse mortgages is that repayment is deferred. This means that repayment of the loan is not due until after the final borrower no longer resides within the house. The decision is yours on whether or not you would like to repay the loan in advance. You will have no early payment penalties with your HECM loan. And with elective mortgage payments1, you have the flexibility to pay as much or as little as you desire, as regularly as you would like.
How much cash can I get with a Reverse Mortgage?
There are many elements that go into determining how much of your house’s 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’s value. Contact me to get your free, no-obligation, personalized quote.
