Basic Overview of a Reverse Mortgage:
An FHA (Federal Housing Administration) Reverse Mortgage or home equity conversion mortgage (HECM) is a type of home loan for homeowners, 62 years or older, that provides cash to the borrower without them having to sell their home, and can be an additional option to consider as part of your retirement planning strategy. In addition to social security, 401k, pensions, or other money you may have saved, the reverse mortgage provides various income options (monthly payment, lump sum or line of credit) by accessing your home equity. For example,
- you may just want to pay off your current mortgage balance – to reduce your monthly expenses,
- you might structure it to receive a monthly payment to augment your income, or
- you may just want a line of credit in place for future emergencies or home repairs
The reverse mortgage loan requires no monthly mortgage payments, though borrowers are responsible for making property taxes and homeowner’s insurance payments. Reverse mortgages allow seniors to access the home equity they have built up in their homes, deferring payment of the loan until they pass away, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest payment is added to cash received, and it is all secured by the home’s value.
The loan balance can potentially exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. But, the borrower’s children are not liable for any amount greater than the home’s value: Per FHA and HUD: The HECM is a “non-recourse loan”. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
Protecting your equity for retirement: With the Line of Credit option, you can close on your mortgage and then leave the credit line untouched until you need it. The money in the account (the unused credit line) will increase in value annually at the interest rate of your loan, just as it would in your checking or savings account. This protects your equity because the value in your line of credit continues to increase, even if the value of your home were to decrease. With the recent rise in values, locking in that value while home prices are at current levels a factor to consider.
This amount is available for you to use whenever and however you want. The line of credit option can also give you lots of flexibility and provide peace of mind should any unforeseen expenses arise.
Augmenting your retirement Income and optimizing your investment diversity: With the Lump Sum or Monthly Payment options, you can augment your income, and defer using your other retirement assets, which gives them more time to increase in value. For many people their home is such an outsized percentage of their retirement assets, that it may make sense to protect the other retirement assets or maximize the timing of the liquidation of those assets. If you don’t own your home outright, part of your money is used to pay off your existing mortgage. The remainder of the money is paid out to you.
You’ll never have to make a mortgage payment for as long as any borrower on your loan lives in the house.
By performing a quick analysis that looks at your property value, current mortgage, and age of borrowers we can provide you an estimate of how much equity you can access via a Reverse Mortgage.