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.
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:
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.