How do reverse mortgages work?
A Home Equity Conversion Mortgage (HECM) allows homeowners to convert a portion of the equity in their home into cash or increase their loan balance over time. A reverse mortgage, as the name indicates, is the opposite of a forward mortgage, where loans shrink as payments build equity. Traditional (forward) mortgages start with a small down payment, a large loan, and a monthly priincipal & interest payment. Forward mortgages create ownership and build equity over time through mortgage repayments and home price appreciation.
Why should you consider getting a reverse mortgage?
With a reverse mortgage, a homeowner is not required to make monthly payments to the lender, and instead, the loan balance grows. That's incredibly helpful during retirement when earnings are reduced. Moreover, a HECM also comes with an optional line of credit that can grows over time. Timely distributions from a HECM can be used to delay social security or coordinate withdrawals from a 401K. The money can also be used to:
- Fund day-to-day expenses
- Make home improvements
- Cover medical expenses
- Pay off high-interest debt
How to qualify for a HECM?
The amount that can be borrowed depends on the borrower's age, the value of the home, and the interest rate. To qualify for a reverse mortgage
- the primary borrower must be 62yrs of age
- have a primary residence that is paid off or have a low mortgage balance
- attend mandatory counseling before application
- be a U.S. citizen or permanent resident
HECMS only require tax, insurance and maintenance. No principal and interest payments are necessary. The loan is settled by the estate when the homeowner dies, or if they sell the home, or no longer use it as their primary residence. Heirs always have the option of repurchasing the home at 95% of the appraised value or the remaining loan balance, whichever is lower.
You worked hard for the American dream. Let it pay you back.
A HECM can improve lifestyle during retirement when used responsibly.
- The proceeds from the reverse mortgage can be used to pay off debt, including your mortgage and revolving loans, to improve cash flows and financial stability.
- A reverse mortgage to fund home renovations and age-in-place and allow for in-home assisted care.
- Some reverse mortgages come with an expanding line of credit that can be reversibly drawn on to travel or pursue hobbies and spend more time with loved ones. This can help you make the most of your retirement years and improve your overall quality of life.
Planning for a long life
- HECMs are calculated based on life expectancy and are not required to be repaid during occupancy. If you live long and the loan balance grows higher than the remaining equity in your home, you can continue aging in place as long as you stay current with taxes and maintenance. HECMs are insured against long-life expectancies by the FHA so the borrower or heirs aren't responsible.
- A HECM can help delay social security collection to maximize the benefit.
- Using a HECM in coordination with other retirement accounts like a 401k or IRA can make them last longer
