The three most amazing things you didn’t know about HECM Reverse Mortgage
In our monthly dinner seminars on HECM Reverse Mortgages, I teach the facts about how a HECM should be used to live better in Retirement. The feedback we get from most people is a surprise. Surprised to learn that things they had heard and knew to be true are either not true at all or not true anymore.
Much has changed in recent years with the HECM Reverse Mortgage. Thus many of the things you’ve heard may no longer be true. Below I’ve listed the top three things that surprise most people about HECM Reverse Mortgages. But first, let me preface these points with a brief explanation of how HECM reverse mortgages work.
How do HECM Reverse Mortgages work:
The easiest way to explain the mechanics of a Reverse Mortgage is to contrast it with the Conventional Mortgage that most people understand.
Mechanics of a Conventional Mortgage:
On a Conventional mortgage, you borrow money from the bank. Then you make a monthly payment for 15-30 years to repay the loan. Part of that monthly payment covers property taxes and insurance, part of it pays down the principal slowly. But most of the monthly payment pays for the interest that accrued on the remaining mortgage balance over the past 30 days.
Mechanics of a Reverse Mortgage:
With a Reverse Mortgage, the only difference is there is NO MONTHLY MORTGAGE PAYMENT. The homeowner will pay their taxes and insurance separately every year. The principal will be repaid when the homeowner passes away or moves out of the home and the interest still accrues every month like a conventional mortgage. But it is added to the balance of the loan rather than paid in a monthly payment. Thus allowing the homeowner to live in the home and own the home. But they avoid the burden of a monthly payment.
The Three Most Amazing things you didn’t know about HECM Reverse Mortgages:
A. Most Reverse Mortgages are guaranteed by FHA –
Naturally, seniors are concerned with the welfare of their children or estates. They worry that if they never make a payment on their mortgage they may outlive their home’s equity. Thus leaving their children with a large debt.
Fortunately, there are two safeguards in place to address this issue.
- Current HECM Guidelines establish a large Equity Reserve. Which for most homeowners will protect their home from ever going upside down. However, markets have been known to crash which could result in negative equity at the time the homeowner dies. This possibility is why FHA issues Mortgage Insurance.
- Mortgage Insurance – Every HECM that FHA guarantees are given Mortgage Insurance. This protection stipulates that even if a homeowner lives to be 150 years old and the home is hundreds of thousands of dollars upside down, FHA/HUD have guaranteed that they will cover the Bank’s losses. This leaves the homeowner and their estate protected against possible losses.
B. HECM Reverse Mortgages have the option of a Growth Line of Credit –
In the old days, the idea of a Reverse Mortgage was that you could live in your home with no payment and if you had extra equity you would also receive a payment from the bank every month for a few hundred dollars.
Nowadays, most people don’t set up Reverse Mortgages to receive a monthly income. Rather they use the Growth Line of Credit. This tool is just as it sounds, it is a line of credit with funds that are available for the homeowner to take when they need it. But the major benefit to this line of credit is it also has a growth factor attached to it. This means that any money left in the line of credit will grow at a rate that is equal to the Interest rate and mortgage insurance rates on the loan. Let’s look at an example:
Imagine our client has an interest rate of 4.5% and a mortgage insurance rate of .5%. The combined rate is 5.0%. He has $100,000 in his line of credit which he doesn’t plan on using for 15 years. That $100,000 is going to grow by 5% annually until he begins accessing those funds.
After year one his Line of credit is up to $105,000. After year five the LOC is up to $127,500. And After 15 years his total funds in the Line of Credit are up to nearly $208,000. In 15 years, that 5% return has grown his available funds by 108%.
C. HECM Reverse Mortgages Allow Voluntary payments –
For many of my clients and especially those still in their sixties I usually recommend they try to make payments on their HECM Reverse Mortgage where possible. For people that are early in retirement making voluntary payments is often the best Reverse Mortgage option.
Remember that with a Reverse Mortgage payments are ALWAYS voluntary so if there are times when the homeowner cannot make a payment they don’t have too and there is no penalty. But when they do have extra money and do make those extra payments a Reverse Mortgage operates the same as a regular mortgage in that its payments cover interest and principal and reduce the mortgage balance.
The reason for making payments with a Reverse Mortgage is that every dollar paid in on a HECM Line of Credit (as explained above) can be pulled back out in the future and will grow by the growth factor until it is pulled back out.
Let’s compare two scenarios to show the power of this Reverse Mortgage Option:
- Conventional Scenario – Imagine our homeowner has a $185,000 conventional mortgage with a 5% interest rate. Over the next 10 years, he is going to pay the bank roughly $120,000 which will reduce his total loan amount by only $35,000. Unfortunately, if the market crashes in 10 years his home’s value could lose 20-40% equity in just a few months and none of that $120,000 in payments has done him any good and cannot be redeemed.
- HECM Reverse Mortgage option – With a HECM Reverse Mortgage, we set up the Line of Credit with the same $185,000 balance and 5% combined interest rate. If this homeowner makes the same $1000 payment every month he will likewise give the bank $120,000 in ten years and pay down his mortgage balance. However, the major difference is this homeowner has deposited $120k into his growth line of Credit which is growing at 5% annually. After 10 years his available funds are now $158,000, every penny can be withdrawn at any time and is never taxable.
By using the HECM Reverse Mortgage like a regular mortgage this homeowner has invested his monthly payment to build a huge cash reserve. This money is protected against market fluctuations and they can pull all of it back out at any time.
If you’re considering a HECM Reverse Mortgage you need to work with a Reverse Mortgage Specialist who understands the tools and strategies to make sure you end up with the best reverse mortgage available.
Call us today to sit down and create a better retirement plan using a HECM Reverse Mortgage.
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