If you’re a homeowner 62 or older, a HECM reverse mortgage can be a great way to supplement your retirement income. You can get tax-free monthly paychecks from your home’s equity for a set period of time or for the rest of your life, depending on your financial goals.
The original concept that led to today’s HECM reverse mortgage is a “housing annuity” that converts the equity in your home into steady monthly cash flow that can be used to finance your retirement lifestyle. This is very similar to a traditional annuity, which converts an investment account into a cash flow stream.
If you’re not familiar with annuities, the following is a good description from Investopedia:
Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one’s assets.
Annuities can also be created to turn a substantial lump sum into a steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.
Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.
In the case of the reverse mortgage, the “substantial lump sum” that is being converted into a “steady cash flow” is the equity in your home. You’re taking your equity, which you can’t spend (you can’t buy a steak with home equity, right?), and converting it into a monthly paycheck that you can spend.
Put Your Equity to Work for You
The equity in your home is essentially a huge savings account that you’ve built up over many years of paying property taxes, maintaining the home, and making mortgage payments. The problem is that you can’t normally access that savings account without either selling the home and cashing out all your equity, or doing a cash out refinance and adding a mortgage payment to your budget.
The reverse mortgage solves both problems; you can access your equity without a monthly payment and without having to give up ownership of the home.
The following are some notable features of the HECM program:
- No monthly payments are required.
- The loan does not need to be repaid as long as at least one borrower is living in the home.
- You remain the owner of the home.
- Loan proceeds can be taken as a lump sum payout, credit line, monthly payment, or some combination of all three.
- Loan proceeds are not subject to income taxes.
- Loan proceeds do not impact Social Security or Medicare benefits.
- The HECM is a non-recourse loan, meaning the most that will ever have to be repaid is the value of the home, even if that’s not enough to cover the entire balance.
- The HECM program is insured and regulated by FHA.
Your obligations under the HECM program are simply to pay property charges such as property taxes, homeowners insurance, HOA dues, etc. and live in the home as your primary residence. As long as you continue to do these things, no monthly mortgage payment is required and the loan does not have to be repaid.
Options for Receiving the Funds
A HECM reverse mortgage is highly customizable, so the proceeds can be distributed in several ways depending on your goals and needs:
- Lump sum: Loan proceeds are paid at closing in one lump sum payment.
- Line of Credit: Loan proceeds are made available as a line of credit that you can tap as needed. Whatever you have available in the line of credit will automatically accrue growth and grow larger over time. This is very similar to the HELOC, which is commonly used for home improvements.
- Monthly Payment: Proceeds can be paid to you as a monthly check for life or a set period of time.
You could potentially go with any one of these options or some combination of all three. That’s one of the reasons the HECM is a powerful retirement planning tool; it can be structured to meet your specific financial needs and goals.
If your goal is to add to your existing income, then you’ll likely want to opt for a monthly payment. Monthly payments can be structured in two ways:
- Tenure: This payment comes in month in and month out for life, regardless of how many years you live. Whether you live another five years or fifty-five years, you’ll continue to receive your monthly check even if you no longer have any equity in your home.
- Term: If you would like to receive a payment for a set period of time, such as 10 or 15 years (or whatever time period you wish), then you’ll likely opt for a term payment. This can be ideal if you only need income for a certain period of time until another income source kicks in.
The great thing about the HECM reverse mortgage is that whatever option you select, you’re not locked into it for the life of the loan. Life has a way of changing your financial needs over time, so the reverse mortgage was designed with the ability to change with them. If you wish to restructure the loan, perhaps taking a larger payment or converting an existing payment stream to a line of credit, you can do that with a quick phone call to your lender.
How Much Can I Get?
How much you qualify for depends on the value of your home, the age of the youngest borrower, and what program you select (fixed rate or variable rate). To get an idea of how much you might qualify for, check out a free, no-strings-attached reverse mortgage calculator. Be sure to select the “line of credit” option.