A Reverse Mortgage HECM, sometimes referred to as a Home Equity Conversion Mortgage (HECM), is a special type of home mortgage that lets a homeowner convert a portion of the equity in his or her home into money in their pocket. Simply put, a reverse mortgage is the exact opposite of a regular mortgage. The lender pays the borrower, and the borrower’s debt will increase as the equity in their home decreases. It allows individuals aged 62 and older to convert their home’s equity into tax free cash to help act as a second income during retirement. A reverse mortgage is a great way to tap into the equity of your home if you are not looking to sell your home and are also looking for tax free income. You may be asking yourself, just how does this work, and when will the loan need to be paid back?
Reverse Mortgage Loan Details
Reverse mortgage loans can be withdrawn in one (or more) of three options:
- Lump sum – funds can be withdrawn all at once if desired
- Line of credit – at the discretion of the borrower, any amount desired up to the maximum loan amount may be withdrawn in one or more dispersions throughout the life of the mortgage.
- Monthly Payment – the most popular choice by far, as a fixed payment is made to the borrower until the balance is depleted.
As aforementioned, the monthly payment option is chosen the most often. I have heard that some 95% of Reverse Mortgage HECM s choose this option, as folks in retirement want to supplement their monthly income, without sacrificing other benefits. Loan proceeds by the way of monthly checks are not considered income and therefore will not affect any of your Social Security or Medicare benefits. A great benefit for the loan is that no payments are due until the house is used for something other than a primary residence by any of the initial borrowers. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current.
What If My Distributions Exceed My Home’s Appraised Value?
Another great benefit of the Reverse Mortgage HECM is that you can never owe more than your home’s appraised value. If your loan balance ends up to be greater than the value of your home, then your mortgage insurance will make up the difference. This feature protects you and your heirs from a future debt that is greater than the value of your home, as well as making sure that you can not be forced out of your home so long as you keep paying the necessary taxes and insurance. Even if the appraised value of your home plummets, it will not affect your reverse mortgage. Any additional value acquired from the sale of the home would be passed onto the surviving legal recipients (beneficiaries).
ONE KEY POINT – in order to qualify for a Reverse Mortgage HECM, you must not have any other liens on your home. If you have an existing mortgage, it must be paid off with the proceeds from the reverse mortgage. This is generally not a problem though, as if you are 62, it is likely that you will already own your home free and clear.