As a quick refresher, a HECM is a Home Equity Conversion Mortgage which is most commonly referred to as a Reverse Mortgage. A reverse mortgage in the simplest terms, is a loan that provides a senior homeowner access to some of the equity in your home without needing to make monthly mortgage payments and without needing to sell your home to get access to your equity.
So let’s breakdown how a reverse mortgage actually works. First, a reverse mortgage must be the only loan against the title of your home. Which means, if you have a mortgage or a HELOC (Home Equity Line of Credit), the first thing we must do is payoff all mortgages using funds from the reverse mortgage. This ensures that the reverse mortgage is in 1st lien position. If you do not have a mortgage or a HELOC and you own your home free and clear of any liens, this is not applicable.
Let’s now take a look at how you can get equity out of your home using the HECM. A HECM actually has three different ways to receive cash from the equity in your home. You can choose any one of the options or you can use a combination of the three different ways to help achieve your needs or goals.
The first option is called a lump sum. This is typically used to pay off an existing mortgage, like we described in the previous paragraph. The lump sum is also used to purchase a new primary residence when upsizing or downsizing, just like if you were to get a traditional mortgage to purchase a new home. The lump sum can also be used to take cash out for any other reason. Some reasons include but are not limited to: paying off debt, home remodeling, needed home improvements, gifting, travel or to cover medical expenses, etc.
The second way to access equity with a HECM reverse mortgage is a Line of Credit (LOC). This is certainly the most powerful, and flexible way to get equity out of your home. The reverse mortgage LOC is similar to a traditional HELOC but is a much more efficient and safer strategy for older homeowners. One of the main reasons is because the reverse LOC is a non-recourse loan which means you can never owe more than the value of the home itself, ever. The other reason is because the unused funds in this LOC are guaranteed to grow regardless of the economy, interest rates, or the future value of your home. On top of all of this, the funds are guaranteed to be accessible to you (as long as you continue to live in the home, pay your property taxes and home insurance). This is not guaranteed with a HELOC because the funds can be frozen and inaccessible in many cases, like if home values drop. Lastly, when you take money out of the LOC, you are not required to pay the money back monthly, unlike a HELOC which requires payments monthly and can increase if interest rates increase. For all these reasons and more, this is again one of the most powerful methods and uses of the HECM.
The third option to access equity from the reverse mortgage is to receive monthly disbursements. Depending on your age, current interest rates and the value of your home, the HECM reverse mortgage loan will allow you to RECEIVE monthly disbursements. These disbursements can be set up for a period of time like 5 or 8 years (this is called a term payment plan). Or you can set up monthly disbursements for life, this is called a tenure payment plan. For example, you may be able to receive $1,500 per month for the rest of your life, $2,000 a month for the next twelve years, or $3,000 per month for the next five years. Each situation is different and will change depending on your home value, your age, and current interest rates. Overall, this is a great strategy to replace lost income due to retirement, divorce, or the passing of a spouse.
The reverse mortgage is a dynamic and customized financial tool that can be implemented for each client’s specific needs and goals. That is why it is so important to work with a local reverse mortgage planner to ensure the product is properly explained, structured, and utilized.
