Reverse Mortgages

A reverse mortgage is a way for older Americans to convert some of their home equity to pay off their current mortgage — if they still have one — and create more cash flow to cover everyday expenses, home renovations, medical expenses, and other needs and goals. It’s different from any other kind of mortgage because you don't have to repay what you borrow until you leave the home or do not comply with the loan terms. You are still responsible for maintaining the home and paying all property taxes and homeowners insurance, as you would with a traditional mortgage.

There are different kinds of reverse mortgages, such as Home Equity Conversion Mortgages or HECMs, HECMs for Purchase, proprietary reverse mortgages or jumbos, and single-purpose reverse mortgages.

HECMs

A Home Equity Conversion Mortgage or HECM is the official name for a government-insured reverse mortgage loan. As a FHA-Insured loan, it is only available through FHA-approved lenders like OneTrust Home Loans. As a loan insured by the government, it has rules and requirements that other kinds of non-insured reverse mortgages may not impose.

While government-mandated insurance adds to the cost of HECM loans, it also adds important consumer protections and guarantees.

• A HECM guarantees that as the borrower, you will receive certain loan payments as agreed upon by the terms of your loan.
• A HECM guarantees that you or your heirs will never be forced to repay more than your home is worth to pay off the loan, regardless of the balance of the loan.

The maximum amount the FHA will insure on a reverse mortgage in 2024 is $1,209,750. Owners of homes that exceed the FHA’s limit may be suited for a proprietary or jumbo reverse mortgage to maximize their home equity payout.

Proprietary Reverse Mortgages or Jumbo Reverse Mortgages

The development of proprietary reverse mortgage loans was a natural outgrowth of HECMs. They were designed for and continue to serve owners of higher-value homes — those exceeding FHA loan limit guidelines — which allow borrowers to access more of their home’s value. For example, Jumbo Reverse mortgage loans take into account home values of up to $10 million, more than 10 times what is possible with a HECM.

As a best practice, most jumbo reverse mortgage lenders offer borrowers some of the same consumer protections as those available with a HECM. For example, the Jumbo Reverse Mortgage Loan is a non-recourse loan just as a HECM is, meaning neither you nor your heirs will have to pay the difference if the loan balance exceeds the home’s value when the mortgage becomes due.

Since jumbo reverse mortgage payments aren’t FHA-insured products, borrowers don’t have to pay upfront or ongoing mortgage insurance premiums, which can reduce your costs over the life of the loan. 

Although jumbo reverse mortgages offer owners of high-value homes many advantages, protections differ from HECM protections. Therefore, prospective borrowers of jumbo reverse mortgages need to be clear about what these protections are.

HECM for Purchase

A HECM for Purchase Loan works a lot like a HECM. You must be at least 62 or older (a non-borrowing spouse may be younger) and live in the home as your primary residence. And just like a HECM, the HECM for Purchase requires no monthly mortgage payments, and you don’t have to repay what you borrow until you leave the home or fail to comply with loan terms. You are, however, responsible for maintaining the home and paying all property taxes, homeowners insurance, and other applicable fees, as you would with a traditional mortgage.

To complete the home purchase, you provide the down payment, using proceeds from the sale of your previous home or other savings and assets, and your lender comes in with the rest of the money in the form of a HECM. The biggest advantage of financing your new home purchase this way is monthly mortgage payments are optional, although you are still responsible for home maintenance and payment of your property taxes and homeowners insurance. 

A HECM for Purchase offers you the flexibility of the cash you have in hand or expanding your property search criteria to homes in preferred areas, or those with more of the amenities and upgrades you want.

Single-Purpose Reverse Mortgages

This type of mortgage is offered by some state and local government agencies, as well as non-profit organizations, but they are not available everywhere. These loans may be used for only one purpose, which the lender specifies. For example, the lender might specify that the loan can only be used to pay for home repairs or the payment of property taxes. Most homeowners with low or moderate income may be eligible for these loans. These are not FHA-insured HECM loans.

Popular Uses of a Reverse Mortgage

As the driver of your retirement, you need to know where you want to go and the best way to get there. The key to your planning will be anticipating what roadblocks, if any, could stand in the way of your journey. You may be worried that Social Security won’t be enough to carry you through retirement. And even if you are fortunate enough to have a pension or other retirement account, you may be wondering whether these funds will last the length of your retirement. 

Reverse mortgage loans have helped more than 1 million Americans nationwide access their home equity to find greater security in retirement. Here are some of the ways a reverse mortgage could help you:

• Pay off existing mortgage to increase cash flow.
  Paying off your current mortgage is a reverse mortgage requirement. By removing your monthly mortgage payments, your cash flow increases. Even if you don’t have monthly mortgage payments, you must continue to  maintain your property, pay property taxes and homeowners insurance, and otherwise comply with all loan terms.
  
• Renovate the home to make it safer and more enjoyable.
  The right home improvements may also help maintain or even increase the value of your home.
  
• Give retirement savings accounts more time to grow.
  By tapping into home equity and leaving your investment accounts intact, your portfolio could continue to grow.
  
• Delay taking Social Security for larger payouts later.
  Social Security benefits increase by a certain percentage each year if you delay your retirement beyond full retirement age. That’s an effective savings plan. Consult with your financial advisor before doing this.
  
• Build a stronger safety net.
  The best defense against unexpected expenses, such as medical emergencies, sudden market downturns, and other life events, is to ensure you have sufficient financial resources standing by to deal with them.
  
• Gain greater peace of mind for long-term healthcare needs.
  By creating a reverse mortgage line of credit, the unused portion of which grows over time, you could have more money for your care when you need it.
  
• Purchase another home that will better fit your needs.
  Instead of using all cash, put down only a portion of the purchase price (from your previous home’s sale or from other savings and assets) and use a HECM to cover the rest, leaving you with no future monthly mortgage payments. You must continue to maintain your home, pay your property taxes and homeowners insurance, and otherwise comply with your loan terms.
  
• Preserve my portfolio in a down market.
  Instead of being forced to sell an investment in a down market, you could wait for the market to rebound by using proceeds provided by a reverse mortgage to make up any shortfall. Consult with your financial advisor.
  
• Pay off higher interest debt.
  Using a reverse mortgage loan to pay off high-interest credit cards or other higher interest debt may prove a sound financial move. What a reverse mortgage shouldn’t be used for is an excuse to overspend or avoid addressing what caused the debt in the first place.
  
• Secure your legacy.
  Consider helping out your children or grandchildren financially while you’re still alive. Help with their down payment on a new home, help with their student loans, and help them build a strong financial foundation for the future.