Millions of Americans are heading into their retirement years facing a cash crunch: they need income, but much of their accumulated wealth over their working lives is in their houses. And houses aren’t very liquid.
In many cases, the retirement-age homeowner can’t qualify for a traditional cash-out mortgage because they’re no longer working and so their incomes aren’t sufficient to meet lender criteria. Or they simply don’t want to commit to a monthly payment back to the lender. But they also don’t want to sell the family home.
Nevertheless, they need income to live on. That’s where Home Equity Conversion Mortgage (HECM) – or as it’s more commonly called, a reverse mortgage – comes in.
Mai kiola a’e ‘oe ia’u i ka wa ‘elmakule; A’ole ho’o e ha’alele ia’u i ka pau ‘ana o ko’u ikaika.
“Do not cast me away when I am old; Do not forsake me when my strength is gone.”
Psalm 71:9., Baibala Hemolele (Hawaiian Bible)
How does a Reverse Mortgage work?
A reverse mortgage is just what it implies: Instead of you sending hundreds of dollars each month to a lender, a reverse mortgage means the lender is sending money each month back to you.
You don’t have to pay it back as long as you or your co-borrower (spouse) stay in your home.
You keep the title.
All the money you receive is secured by a lien the equity in your home. After the death of the last borrower, the lender is repaid upon the sale of the home. Repayment is not due until both the borrower and his or her spouse have deceased, or have not lived in the home for at least 12 months.
After your death and the death of your spouse, your heirs can let the estate sell the home, repaying the lien, or if they choose to keep the home in the family, they can simply pay the lien off directly. Your loved ones can choose.
How to Qualify
To qualify for a reverse mortgage, you must meet these basic criteria:
1. You must be 62 or older.
2. You must reside in the home as your primary residence.
3. You must have at least some equity in your home. It doesn’t have to be paid off entirely. Reverse mortgage lenders can and do work with homeowners who have remaining balances all the time.
4. You must attend a HUD-approved consumer counseling session.
Reverse mortgages are among the most commonly misunderstood financial solutions on the market today. Here are some of the most common myths and misconceptions concerning reverse mortgages:
Myth: The bank will own your home.
Fact: In a reverse mortgage, you retain ownership of your home. The title will remain in your name. The bank will not own your home. However, they will have a lien on the home, so that they are assured of eventual repayment. But you don’t have to repay that loan during your lifetime. The lender is repaid upon the sale or transfer of the home – normally after the death of the borrower or borrower’s spouse – whichever occurs last.
Myth: I could get forced out of my home.
Fact: The lender cannot force you or your spouse out of your home against your will. The HECM reverse mortgage was designed to enable seniors to remain in their homes for as long as they live. You cannot be foreclosed on or evicted as long as you are paying property taxes and insurance premiums, and maintaining the home in accordance with HUD requirements.
Myth: Reverse mortgages could push me into a higher tax bracket.
Fact: Reverse mortgage income is considered loan proceeds, not taxable income.
Myth: What if my home falls in value? I don’t want to owe more than my home is worth.
Fact: Reverse mortgage loans are non-recourse. The lender cannot go after you, personally, nor your estate, nor your heirs for any amounts they can’t recover from the sale of the home. You can never owe more than your home is worth on a reverse mortgage.
How to Access Reverse Mortgage Funds
If you’re age 62 or older and meet the other qualifications, you have several choices about how to access your home equity:
1. Up-front draw. You can take your reverse mortgage proceeds up front as a single lump-sum withdrawal.
2. Tenure. This option provides regular income payments for as long as the borrowers live in the home. The specific amount depends on your age and actuarial life expectancy. The older you are, the higher the payments are likely to be.
3. Term. The lender will make regular and agreed-upon income payments for a set number of years.
4. Line of credit. Your loan proceeds are available as a line of credit. You can borrow from this line of credit at will, and you can repay it at will, or let the amount accrue, to be repaid when the home is transferred. One advantage to this form of HECM is that unlike other types of credit lines, the lender cannot freeze or revoke the credit line while you still have a remaining balance. Other types of credit lines can be frozen or revoked at any time.
Meanwhile, if you don’t take the entire line of credit out, the remaining amount that you leave with the lender will grow over time – gradually increasing your available line of credit in the future.
I want to move down in house. Can a reverse mortgage help me?
Yes! If you qualify and have enough home equity, you can absolutely use a reverse mortgage to move out of your current home and get into a less expensive home. This means you have the opportunity to “right-size” your home after all the kids have moved out, move to a better neighborhood, move nearer health care providers or move closer to family.
Contact us for details, and for a full analysis of your personal situation.
A reverse mortgage is not the perfect solution for everybody. But it can be a lifesaver for the right person. If you are age 62 and older, have a significant amount of home equity, and you want or need to convert that equity to income or a cash lump sum, contact us today at (808) 891-0415 for a full analysis. We will present you with your options, and you can make an informed decision.
Mahalo from all of us at Pacific Home Loans.