When soon-to-be retirees are planning for retirement or are looking to supplement their current financial situation, an area that is getting a closer look from financial advisors is a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage loan. While a reverse mortgage isn’t intended to replace one’s retirement plan, when used sensibly, it can be a valuable means of complementing one’s finances.
In a recent article from The Street, a financial advisor reveals learning how the benefits of a HECM loan as compared to a traditional Home Equity Line of Credit (HELOC) may be to better help seniors in or nearing retirement with their financial security.1
A reverse mortgage is a Federal Housing Administration (FHA) insured loan2 for homeowners who are 62 years and older. A reverse mortgage loan allows senior homeowners to access a portion of their home’s equity into funds that can be used to pay for everyday living expenses, make home improvements, afford medical/prescription costs, cover large or unexpected expenses, or set aside proceeds for an emergency fund.
Borrowers have a few requirements they will be responsible for during the life of the loan. If there is a mortgage on the home, it must be paid off using the proceeds from the reverse mortgage loan.3 Borrowers also must reside in the home as their primary residence, continue to pay the required property taxes, and homeowner’s insurance, and maintaining the home according to FHA requirements.3
Benefits of a Reverse Mortgage in Retirement
- Eliminate Monthly Mortgage Payments3: Senior homeowners can increase their monthly cash flow by eliminating their monthly payment, allowing them to focus on other financial obligations.
- Access to a Low-Cost Line of Credit4: With an adjustable-rate HECM, there is the ability to draw from a line of credit at any time (in any amount) until the line of credit is exhausted, or let it sit and grow over time, allowing access to additional cash if the home value increases.
- Receive Funds in a Lump Sum5: With a fixed-rate HECM, seniors have the option to receive a portion of their home’s equity in a lump sum, often to pay for home improvement projects or to consolidate other debt.
- The Ability to Age in Place6: A HECM allows seniors to age in the comfort of their homes while maintaining ownership and the title.
Interested in learning more about how to use a reverse mortgage as part of your retirement plan? Call (800) 976-6211 to speak with a licensed reverse mortgage advisor for a free, no obligation loan assessment.
2 As required by the Federal Housing Administration (FHA), you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3 Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
4 The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.
5 The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements. In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance. This disbursement option is only available for a fixed rate loan.
6 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.