A great way to enhance your financial security is with a Reverse Mortgage which is also known as a Home Equity Conversion Mortgage. Many homeowners across the nation have chosen a HECM to help them meet financial and personal goals. This is a popular option for seniors who want to tap into a portion of the equity in their home and gain access to tax-free funds.
Funds Available, Distribution Options, Interest Rates and Costs
- Fixed and variable loan rates may be available
- Most closing costs and fees can be financed as part of the loan, resulting in little or no up front fees
- Amount available is based on the age of the youngest borrower, current interest rates, existing mortgage amount, and the lesser of the appraised value of your home, sale price or the maximum lending limit.
- Receive your funds in a lump sum, a regular monthly payment, a credit line, or a combination of these options
- The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. You may need to set aside additional funds from loan proceeds to pay for taxes and insurance. Consult your advisor for detailed program terms.
- Homeowner must be at least 62 years old
- Must have sufficient equity in your home
- Single family home, two to four unit owner-occupied home, townhouse, approved condominium or manufactured home
- Must meet financial eligibility criteria as established by HUD
- Eliminates existing monthly mortgage payments
- Stay in your home and maintain the title
- Heirs inherit any remaining equity after paying off the HECM loan
- Federal Housing Administration (FHA) insured loan program
- Loan proceeds are tax-free
Deferring Social Security with a Reverse Mortgage
The Borrower Situation
Susan Parker earned $60,000 per year as a systems project manager until she lost her job nine months ago. At 63, she was having a difficult time finding another job and was considering retiring early. She knew that this would mean lower lifetime Social Security benefits than if she deferred until age 70, but what else could she do? She had exhausted her unemployment benefits and was drawing down on her savings to pay for her mortgage and other living expenses.
A Home Equity Conversion Mortgage (HECM) helped Susan pay off her existing home mortgage and improved her monthly cash flow by $1,500. She also elected to receive her remaining HECM loan proceeds in equal monthly payments of $1,091 for as long as she lives in the home. She was in excellent health and expected to live well into her early 80s. With these additional sources of funds, Susan could defer drawing her Social Security benefits until age 70, resulting in increased monthly benefits of $847 or $22,596 over her lifetime.
Myths & Realities of a Reverse Mortgage and HECM
As with many financial products, reverse mortgage loans can be complicated and there may be a number of misconceptions about how the product works. Do you know the myths vs. the realities?
Myth No. 1: The lender owns the home with a Reverse Mortgage
You will retain the title and ownership during the life of the loan, and you can sell your home at any time. The loan will not become due as long as you continue to meet loan obligations such as living in the home, maintaining the home according to the Federal Housing Administration requirements, and paying property taxes and homeowners insurance.
Myth No. 2: The home must be free and clear of any existing mortgages
Actually, many borrowers use the reverse mortgage loan to pay off an existing mortgage and eliminate monthly mortgage payments.
Myth No. 3: Once loan proceeds are received, you pay taxes on them
Reverse mortgage loan proceeds are tax-free as it is not considered income. However, it is recommended that you consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Myth No. 4: The borrower is restricted on how to use the loan proceeds
The cash proceeds from the reverse mortgage loan can be used for any reason. Many borrowers use it to supplement their retirement income, delay receiving social security benefits, pay off debt, pay for medical expenses, remodel their home, or help their adult children. You have worked hard for this asset and prudence along with budgeting should be the proper approach to enjoying proceeds received from your reverse mortgage.
Myth No. 5: Only poor people need reverse mortgages and HECM
The perception of the reverse mortgage as an assist for the “poor” borrower is changing – many affluent senior borrowers with multi-million dollar homes and healthy retirement assets are using reverse mortgage loans as part of their financial and estate planning, and are working closely in conjunction with financial professionals and estate attorneys to enhance the overall quality and enjoyment of life.
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