If you are short of cash in your retirement years and you own your home, a reverse mortgage may provide an ideal solution. A lender can provide you with a loan that is secured by your property. This type of financial arrangement is known as a reverse mortgage. It is similar to a traditional mortgage in one important way: the financing institution uses your home as collateral for the funds that are advanced to you. However, a reverse mortgage is specially structured to accommodate the requirements of older individuals who may have retired and do not have adequate income. It provides a homeowner with money, which is repayable when the individual no longer uses the home as their principal residence or fail to meet the obligations of the mortgage. If you are over 62 years old, you can use your home to raise funds under the Federal Housing Administration’s (FHA) reverse mortgage program. This plan, which is known as a Home Equity Conversion Mortgage (HECM), can be a good option if, for example, you want to supplement your Social Security or pay for unexpected medical expenses.
Benefits of an HECM
You don’t need to pay monthly installments
Unlike many other types of loans, an HECM does not require you to make a monthly payment. In fact, an HECM does not have to be repaid until the last surviving borrower has passed away. However, if you sell or move out of your house, you will be required to repay the loan at that time.
You can use the proceeds to pay off your existing mortgage
What if you already have a mortgage on your home? You can use the proceeds of the reverse mortgage to pay it off. The remaining funds can be used in any manner that you like.
Buy a new home with a reverse mortgage
According to the rules framed by the US Department of Housing and Urban Development, you can even buy a new home with a reverse mortgage. This is called an HECM for Purchase loan. However, to be able to do this, you must have the cash to pay the difference between the HECM proceeds and the purchase price of your new residence.
Flexibility in receiving funds
Remember that a reverse mortgage has been designed to assist older individuals to arrange the money that they require for their needs. Keeping this goal in mind, the authorities permit borrowers to draw funds in a variety of ways. You can receive your loan proceeds in any combination of the alternatives listed below:
- Line of credit – draw only as much as you need, when you need it. You can minimize your interest burden in this way.
- Lump sum withdrawal – get the entire loan amount immediately.
- Tenure – receive monthly payments for the life of the loan. This is ideal for meeting your regular expenses.
- Term – receive monthly payments for a pre-determined number of years.
Your heirs benefit too
At the end of the loan period, the principal and interest will need to be repaid. Most reverse mortgages are typically are repayable when you die, but may need to be repaid sooner if you no longer use the home as your principal residence, or fail to pay taxes or insurance, or make needed repairs. You may choose to pay off the loan by selling the home and using the proceeds to pay off the reverse mortgage. Alternately, your heirs could choose to repay the loan and retain the home. What if the amount that the home is sold for is insufficient to repay the loan? Are your heirs liable for the difference? According to the rules in force, the lender cannot recover any outstanding amount from your heirs. But if the sale value of the home is greater than the mortgage amount that is outstanding, your heirs will get to keep the difference.
You can use the money any way you like
There is no restriction in the manner in which the loan funds can be utilized. You can use the regular monthly payments to meet your day-to-day expenses. The funds can also be used to pay off medical bills or take care of recurring healthcare costs. However, it is your responsibility to pay the property taxes and insurance for your home.
A tax-friendly financial product
The money that you receive from the lender in a reverse mortgage transaction is absolutely tax-free as it is not treated as income. It is a loan that needs to be repaid at a future date.
Finance Your Retirement with an HECM
This financial product has been designed especially for seniors. If you meet the lending institution’s criteria, you can use the equity in your home to finance your retirement. Thousands of older Americans are using this method to supplement their other income and to pay for their daily expenses.
Resources
1) https://www.consumerfinance.gov/ask-cfpb/when-do-i-have-to-pay-back-a-reverse-mortgage-loan-en-236/
