First thing first, 98% of all reverse mortgages today are the Federally Insured Home Equity Conversion Mortgage or HECM. This is HUD and FHA’s new name for the reverse mortgage. So it’s important to realize that when commercials and marketing material advertise reverse mortgages, they’re talking about the Federally Insured reverse mortgage or HECM. A HECM reverse mortgage can be a retirement tool – a financial instrument. There is no reason to jump to conclusions that a HECM reverse mortgage is bad. As a matter of fact, I think for many retirees, the HECM reverse mortgage pros far outweigh the cons.
One common HECM reverse mortgage myth: many children of parents who are considering the reverse mortgage fear their inheritance may dwindle away if mom or dad takes out such a mortgage.
In fact, using up home equity instead of spending more IRA assets can actually preserve more wealth for heirs. In some cases it can also provide additional tax benefits for heirs. For example, if the parents dictate legally they want the home to go to the kids for a future sale, the heirs will inherit the tax deduction for accumulated unpaid interest. This is one of many unknown “pros” of a HECM. There are more Pros and Cons listed below.
- No monthly payments required – They are completely optional every month
- No income or asset requirements
- No minimum credit score
- No restrictions on use of proceeds
- It provides tax-free income
- HECM’s are not mortgages. they are simple interest Credit Lines that can be paid back or not
- The HECM Credit Line will never “reset” or “mature”
- The unused portion of the Credit Line Limit will actually “grow” or increase every year
- HECM’s are non-recourse, meaning o personal liability – you can never owe more than the value of the property
- May be Titled in your trust or life estate (such as a revocable living trust or irrevocable trust)
- Provides guaranteed income for life.
- Protects yom retirement investments against market downturns, so you don’t have to draw in a “bear market”
- HECM programs are Federally mandated. so expenses and terms are consistent across the country
- FHA insures your HECM so if your mortgage value goes up beyond the value of your home the lender cannot take yom home and you do not owe the difference. nor does yom heirs.
- When you sell yom home, just as with any mortgage. the mortgage gets paid off and any additional equity belongs to you
- Yom heirs have longer (up to 12 months) to satisfy the balance after the last person passes away. Traditional mortgages want their money within 90 days!
- You can borrow somewhere between 55% and 70% of your home’s value
- HECM’s do not affect yom credit score
- And to dispense the biggest misconception … You own the property at all times, the bank does NOT own your home!
Uses of a HECM
- To pay off your existing mortgage and eliminate your mortgage payments
- As a line of credit to provide liquidity
- To reduce the risk of outliving assets
- To protect the remaining spouse from the loss of income due to death or a divorce
- To protect your retirement nest egg from market swings or declines
- To provide cash so you can defer your Social Security start date to maximize the benefits
- To fund long term care insurance
- To pay outstanding consumer debts
- To help pay high property taxes and insurance
- To pay for needed home repairs or home improvements
- To support “Age in place” expenses for home modifications
- To help your children or grandchildren with some advance inheritance
- To “Right-Size” to a home that better fits your needs or lifestyle
- To pay for in-home care later in life
- To travel
- Or really any other purpose
- If you move within 2 years of taking out your HECM, which is the same with any mortgage
- You must pay your real estate taxes and maintain the home, which is the same with any mortgage
- You must be at least 62 (age is determined by the youngest borrower)
As you can obviously see, the pros outweigh the cons when it comes to the new and improved FHA-Insured HECM Credit Line. So when the time comes to make a decision regarding whether you should or shouldn’t move forward with the HECM Credit Line, make a list of pros and cons and compare it to your current mortgage situation. The results just might surprise you from your preconceived notions of the reverse mortgages.