Are you considering a reverse mortgage, but are overwhelmed by all the information out there? We’ve highlighted five key features of a reverse mortgage below to help you decide if this product is right for you.
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors age 62 and older to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments.2
Product safeguards
Additional safeguards have been put into place over the last few years to better protect borrowers and help reduce foreclosures. For example, new guidelines limit the amount of equity you can borrow within the first year. The new guidelines also require borrowers to demonstrate they’re able to continue paying taxes and insurance, and can maintain the home for the life of the loan. Furthermore, new rules allow non-borrowing spouses, such as a spouse under the age of 62, to remain in the home after their borrowing spouse permanently leaves the home or passes away.
Eliminate your monthly mortgage payments2
While you don’t need to own your home free and clear in order to qualify for a reverse mortgage, you do need to have enough equity in the home to pay off any existing mortgage balance. In fact, many seniors use the proceeds from a reverse mortgage to pay off their existing mortgage and increase their cash flow.
Flexible options for receiving your money
Borrowers can receive their loan proceeds as a lump sum, monthly payments or as a line of credit. When you receive monthly payments, you can choose either the term or tenure option. Term means you’ll receive monthly checks for a fixed period of time, whereas with tenure, you receive monthly payments for the life of the loan. Many seniors choose to receive monthly payments as a way to supplement their retirement income. With the line of credit option, you can use the funds as needed. For example, you can access the funds in case of an emergency or as an alternative to drawing on your retirement accounts in a down market.
Line of credit
When you take a line of credit, interest only accrues on funds used. This gives you the flexibility to use the funds at a later date. The unused portion of a line of credit grows over time at the same rate as your loan. This feature gives you increased access to borrowing power. Therefore, taking out a reverse mortgage in your early years of retirement can be advantageous because it gives your line of credit more time to grow.
Non-recourse loan
The HECM is a “non-recourse” loan. This means that your heirs are not personally liable if the home sells for less than the loan balance. In addition, no assets other than the home can be used to repay the debt.
As with any financial decision, it’s best to talk to a trusted advisor to ensure this product makes sense for you and your situation. If you’d like to learn more about reverse mortgages and see if you’re eligible, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz