A reverse mortgage: is it right for you?

What to do when a college diploma brings a mountain of debt.

Looking for additional cash flow? If you own a home, you’re in luck: a reverse mortgage is one way to get it.

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, allows you to tap into your home’s equity without selling your home. Rather than sending a check to the bank each month, the bank sends a check to you. In other cases, HECMs are set up so the bank gives you a lump sum of money up front, or you can have a line of credit to draw from as you need money. You can use the money for any purpose, like supplementing your retirement income, making home improvements, paying for health care expenses, or using it as a financial planning tool.

As with any financial decision, it’s important to first be well informed so you can make a confident decision about getting a reverse mortgage. Let’s start by understanding exactly how it works.

How a Reverse Mortgage (HECM) Works

The basic idea to a HECM is that a bank lends you part of your home equity for as long as you are living in the home. The money lent to you accrues interest each month, but you don’t need to make any payments back to the bank until you do one of the following things:

  • Sell your home
  • Stop using the home as your primary residence
  • When the last surviving spouse passes away
  • Do not pay your real estate taxes or homeowners insurance, after all available equity is used
  • Do not keep your home in good repair

When any of those things happen, the HECM is due in full. Often, borrowers end up using the proceeds from selling the home to pay back the reverse mortgage.

Eligibility Requirements

Who’s eligible to get a HECM? You have to be:

  • Age 62 or older, unless you own the home jointly, then only one of you needs to be 62 or older.
  • A homeowner without a mortgage, or with significant equity.
    • If you have a small mortgage, the bank will set up the HECM so it pays off your existing mortgage before you can receive any money.
  • Current on your property tax and homeowner's insurance payments.
  • Living in the home as your primary residence.
  • Maintaining your home in reasonable condition.
    • The bank will inspect your home prior to offering the mortgage and may require that you make specific repairs. Also, you must keep up with maintenance and repairs while you have the HECM.
  • Able to attend a HUD sponsored-counseling session, to determine fit. This required session is typically 60 to 120 minutes, in person or on the phone.
  • Able to show sufficient income to cover the monthly real estate tax, homeowners’ insurance and pre-defined maintenance costs, as determined by a financial analysis test.

Advantages of HECMs

If you’re living on a fixed income during retirement, a reverse mortgage (HECM) has a few facets that make it very appealing, such as:

  • It lets you tap into your home equity without having to sell your home, which allows you to access some of the wealth you have built during your working years.
  • You are not required to make payments to the bank while you are living in your home, unlike traditional home equity loans, home equity lines of credit or even conventional mortgages. However you can make payments or even pay down the HECM balance without any penalty.
  • There are flexible terms on how much money you can get, which allows you to set up the HECM in the way that works best for your needs.
  • The available equity in the HECM credit line grows over time, providing you more funds in later years.
  • It’s government insured, so no deficiencies are owed by the homeowner, the estate or heirs upon sale of the property. In other words, the government will pay any shortfall, should the loan balance be greater than the value of the sold home.

Disadvantages of HECMs

On the other hand, an HECM can have serious repercussions, not only for you but also for your family and heirs, such as:

  • Variable interest rates: the money you borrow, with most programs, accrues interest at a variable rate that can increase or decrease over time. Though there is an annual and lifetime cap on the interest rate, the rate can become significantly greater than today’s rate on a conventional fixed rate mortgage.
  • Negative amortizing loan balance: when it’s time to repay the reverse mortgage, the loan balance will include principal, accrued interest and ongoing mortgage insurance. This will most likely be greater than the beginning balance. So if you were planning to leave your home to your heirs, they will need to repay the reverse mortgage with their own funds or a new conventional purchase mortgage. Often, the estate/heirs will need to sell the home to repay the reverse mortgage. However, they will never have to pay more than the value of the sold home, as the government will pay any shortfall.
  • Considerations for income-based benefits: reverse mortgage proceeds are not considered income when determining your eligibility for income-based benefits, including Medicaid and SSI. However, you need to check with the state or local agencies to confirm if there are any restrictions, regarding how proceeds may or may not be used.
  • Financing costs: many lenders charge significant closing costs, which can easily exceed $10,000. Those costs are often added to the loan balance and will need to be paid upon repayment of the reverse mortgage. However, Liberty Bank offers only low (or no) cost options, which will reduce or eliminate that disadvantage.

  • Need a hand in going over your options? Let Liberty Bank help you decide if a reverse mortgage (HECM) is right for you.

    This material has not been reviewed, approved or issued by HUD, FHA or any government agency.


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