A Reverse Mortgage Can Save Your Future

Home Equity Conversion Mortgage (HECM)

By Gary R. Crum

An Example

Dorothy Rogers helped her husband, John, build their Hampton, N.H., home in 1975. About two decades later, Mr. Rogers died - just 20 days short of retirement. And she came close to losing the place. "I lost John, his insurance, and most of his pension," Mrs. Rogers recalls. "I received a little of his pension, but it lasted only about one year." Social Security kept her barely afloat, but it was outpaced by inflation. It's a relatively common problem among senior citizens: Although they own their homes, they don't have enough money to handle unexpected expenses and increasing property taxes.

The answer for Rogers - and for a small but increasing number of seniors: a reverse mortgage. These loans pay the homeowner, in a monthly payment or one lump sum, using the equity in their house as a source of funds. The loan does not have to be repaid until the house is vacated.

Rogers went to Wells Fargo Home Mortgage and closed on a $77,000 FHA Home Equity Conversion Mortgage (HECM). She now receives more than $600 a month in extra income.

Tap Your Home's Equity

Some seniors find 'reverse' plans let them tap home equity when they need it most. For many people, their home is their largest asset and if they need money, they can access the equity built up in their home. There are several ways to access that equity: Sell the home, or refinance the mortgage and take out cash in one lump sum, or take a home equity loan and draw down on the equity monthly. A fourth alternative is to take a reverse mortgage. In all of these example of loans discussed here have one thing in common, the equity in the home is being reduced by the amount borrowed.

Pros and Cons of a Reverse Mortgage

One of the most frequent complaints heard about reverse mortgage is that when the borrower passes, the loan balance must be repaid. As with all loans, when money is borrowed it must always be repaid.

When the owner of a home secured by a reverse mortgage passes away, the mortgage is typically paid off through one of the following methods:

- Sale of the Home: The home is sold, and the proceeds from the sale are used to pay off the reverse mortgage. Any remaining funds after paying off the mortgage go to the homeowner’s estate.

- Heirs’ Repayment: If the heirs wish to keep the home, they can repay the reverse mortgage balance (including interest) to the lender. They may do this by refinancing the mortgage into a traditional loan or using other funds.

 - Life Insurance or Other Assets: Sometimes, the homeowner has life insurance or other assets that can be used to pay off the mortgage. The beneficiaries can use these funds to settle the debt.

- Deed in Lieu of Foreclosure: In some cases, the heirs may choose to give the home back to the lender through a “deed in lieu of foreclosure.” This avoids a formal foreclosure process but still satisfies the mortgage debt.

It’s essential for the heirs or the estate executor to communicate with the lender promptly to discuss the best approach based on the specific circumstances. Keep in mind that reverse mortgages have unique rules and requirements, so seeking legal or financial advice is advisable during this process.

Reverse mortgages have a place for when used for such purposes as described here. It should be noted that the loan payback principal and interest for reverse mortgages is added to the initial loan amount. Therefore, the total mortgage principal increases monthly, but the monthly payment stays the same.

The Key Advantage is that the Homeowners Got to Keep Their Home

In addition to being a resource for medical expenses, the proceeds from a reverse mortgage can be used for any purpose, such as taxes, paying off debts, enjoying a better lifestyle, or even investing. HECMs offer some distinct advantages over normal home-equity loans since no payments have to be made as long as the borrowers remain in the home.

And importantly, if your home equity loan ends up being greater than your home's value, you don't have to make up the difference. The home is the only asset a lender can attach.

With a reverse mortgage, you have several options for withdrawing money, each with its own benefits and considerations:

- Lump Sum: You can withdraw all available funds at once. This option typically comes with a fixed interest rate1. However, it may be riskier for younger borrowers as it can lead to running out of funds sooner.

- Line of Credit: This allows you to draw money as needed, similar to a credit card. The unused portion of the credit line can grow over time, giving you more borrowing power in the future.

- Monthly Payments: - Tenure Payments: Receive fixed monthly payments for as long as you live in the home.

 - Term Payments: Receive fixed monthly payments for a set period1. Combination: You can also choose a combination of these options, such as taking a lump sum initially and then receiving monthly payments or having a line of credit.

Each option has different costs and risks, so it’s important to consider your financial needs and long-term plans when choosing how to withdraw money from a reverse mortgage.

Free Consumer Advice About Reverse Mortgages

Before doing anything with a reverse mortgage, gather more information and talk with responsible family members or friends. Here are two excellent sources for professional information.

Consumer Advice from the FTC: The Federal Trade Commission provides valuable information on reverse mortgages, including potential risks, how they work, and tips for getting the best deal. You can find this advice on their website. Federal Trade Commission

National Reverse Mortgage Lenders Association (NRMLA): NRMLA offers a free Reverse Mortgage Self-Evaluation guide with essential questions and considerations for interested consumers. It’s a helpful resource to assess whether a reverse mortgage is right for you. Free Consumer Guide