You’ve probably seen the ads online or on television with celebrity spokespeople like Henry Winkler, Tom Selleck, and Fred Thompson. But what is a reverse mortgage? How does it work? Is it a good option for you? We’ll cover the basics of how a reverse mortgage works so that you can make an informed decision about whether it’s right for you.
Why the Reverse Mortgage?
According to US Census data, the median household net worth for seniors 65 or older is $201,500. That sounds like a good statistic, but here’s the issue: almost 70% of that number is home equity. Home equity is great to have, but it’s not liquid. Because it’s not liquid, it has no practical impact on your retirement lifestyle. Think about it: if you don’t plan to sell your home, it doesn’t matter if you have $5 or $500,000 in home equity. It’s just a number on paper. Case in point: there are seniors with seven figures worth of home equity in the San Francisco area who are practically living on cat food. They’re technically millionaires, yet they’re barely scraping by on Social Security. Yes, home equity is great to have, but it has no impact on your retirement lifestyle unless you can convert it into cash.
In the past, there were just two ways to convert home equity into cash: 1) sell your home, or 2) get a “cash out” mortgage. Obviously, selling makes no sense if you desire to live in the home. The second option, a “cash out” mortgage (including HELOCs), defeats the purpose of converting equity into cash. It makes no sense to add another payment to the picture if the goal is to have more money to work with.
The reverse mortgage was created to offer a third and better option. It was created to give seniors access to their largest asset – home equity – without selling or taking on a mortgage payment.
What is a Reverse Mortgage?
First of all, a reverse mortgage is simply a home loan. It’s a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home. The most common reverse mortgage in America today is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you know somebody who recently got a reverse mortgage, it’s likely they got a HECM.
The HECM was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. Today, the HECM is overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 HECMs are written every year in America today. That number is likely to grow in the future as more seniors learn about the program.
HECM Reverse Mortgage Basics
There is a lot of misinformation out there about reverse mortgages. You’ve likely heard at least some of it. Let’s get some of the basics down before we dig into deeper topics later.
- The minimum qualifying age is 62. If you’re married, only one spouse needs to be at least 62. The younger spouse can qualify as an eligible non-borrowing spouse (NBS).
- No mortgage payments are required as long as at least one borrower or non-borrowing spouse is permanently living in the home, maintaining it, and paying the required property charges.
- You remain the owner of the home. Because you’re the owner, you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the reverse mortgage balance. If your heirs don’t want the home, they can sell it. Once the home is sold, the balance is paid off and the remaining equity goes in your estate. If your heirs don’t want the home and don’t want to hassle with selling it, the lender will sell it. Any remaining equity goes into your estate once the reverse mortgage is paid off.
- The HECM is non recourse. The most that will ever have to be repaid is the value of the home. FHA will cover any shortage if you end up owing more than the home is worth.
- HECM proceeds are not subject to income taxes. The HECM is a mortgage, so there is an expectation of repayment at some point. Because of that, HECM proceeds are not subject to income taxes.
- No impact on Social Security retirement or Medicare benefits. HECM proceeds don’t impact Social Security and Medicare, but they can potentially impact Medicaid and Social Security disability benefits. If you receive these benefits, make sure you understand how the HECM could impact them.
Now that we’ve covered the basics of how a HECM reverse mortgage works, click the link below to learn about common myths and misconceptions.