How Do HECM Reverse Mortgages Work?
The Mechanics of how HECM Reverse Mortgages work is more simple than you’ve been led to believe. When you understand the truth about the HECM Reverse Mortgage it will seem a lot less scary. To help, let’s compare a Reverse Mortgage to something you know, a 30 year fixed mortgage.
Mechanics of a 30 year Fixed Mortgage
You’ve likely had a 30 year fixed mortgage at some point in your life. When you set up your mortgage these were the basic terms of that agreement:
- The bank loaned you money to buy or refinance your home.
- The bank charged you interest on any remaining balance every month.
- You made a monthly payment to pay that interest as well as part of the remaining balance so the mortgage would be repaid after no more than 30 years.
- Bottom line is the bank borrows you money and they get that money back plus interest in 30 years or less.
Mechanics of a Reverse Mortgage
There is really only one major difference with how HECM Reverse Mortgages work vs. the 30 year fixed. It is, MONTHLY PAYMENTS ARE OPTIONAL. That means you can make payments on a Reverse Mortgage IF you want but you NEVER have too, as long as you live in the home and pay your other property expenses.
For most people this means they’ll go the rest of their lives and not make another monthly mortgage payment. You’re now probably asking why would the bank do that? Let me outline this again to compare it with your 30 year fixed mortgage to clarify the bank’s motivation.
With a Reverse Mortgage:
- The bank loans you money to buy or refinance your home.
- The bank charges you interest on any remaining balance every month.
- You CHOOSE to make a payment or not. Any interest you don’t pay every month is added to the balance of the mortgage.
- The bank is repaid the money they loaned to you and any unpaid interest when you sell the home or pass away.
- Banks are willing to do this because they know at some future point in time they will be repaid everything they’ve borrowed on the mortgage and any interest that was charged.
How long will the loan last?
Current law that dictates Reverse mortgages guarantee the mortgage until age 150 for the youngest person on the mortgage. In other words, the loan will last until the end of your life or until you sell the home or fail to keep the other agreements of the mortgage.
What are the other agreements?
As I mentioned earlier there are two basic agreements with a Reverse Mortgage.
- You will use the home as your primary residence.
- You can have renters in the home as long as you live there too.
- If you are out of the home temporarily for something like rehab from a surgery that is fine as long as you are not out of the home for more than 1 year.
- You cannot move out of the home permanently without selling or refinancing.
- You must maintain basic property upkeep and expenses. Things like
- Keeping the home safe and livable.
- Paying your property taxes, insurance, HOA’s and other basic home expenses
If you comply with these basic agreements the bank cannot foreclose on you and take the home back.
What are the risks to my Heirs?
As is the case with a 30 year fixed mortgage, when you pass away your heirs will inherit the home. It is up to them to either sell or refinance the home to pay off your mortgage.
The HECM Reverse Mortgage is insured by HUD and FHA’s Mortgage insurance fund. This means that if there is ever a loss to the bank because of your mortgage FHA has insured the loan and they will cover the costs so your heirs are never responsible.
So, if you live to be 142 and your mortgage has surpassed your home’s value by $2 million (All of which is VERY unlikely) FHA will cover those losses and your heirs can never be held responsible for any of it.
Will the heirs get any inheritance?
The answer to this question depends on the market more than the mortgage. The New Reverse Mortgage is designed to protect the home’s equity as much as possible so it is pretty unlikely that your home will ever go upside down. However, markets do have a tendency to crash every decade or so. If your home is sold during a market crash it is possible your value could be low enough to not pay off the mortgage balance and leave an inheritance. But in most situations when the home is sold there will be enough equity to pay off your mortgage and leave a substantial amount of your equity to your heirs.
Is a Reverse Mortgage Right for you?
A HECM Reverse Mortgage is not the right solution for everyone but it is the right solution for far more people then are now using it. Fear of the unknown and negative myths is preventing millions of Americans from living far better by using a Reverse Mortgage. My goal is to educate as many people as possible so they know what their options are and how they could live better with the benefits of a Reverse Mortgage.
If you or someone you love is curious about this amazing product and want more information give us a call.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770