What is Reverse Mortgage?
A Reverse Mortgage (known as a HECM- Home Equity Conversion Mortgage) is a FHA (government insured) loan. A Reverse Mortgage is a loan that allows the senior who lives in the home and qualifies to access a portion of their equity without being required to make a monthly mortgage payment for as long as they live in the house and keep their property taxes and homeowners insurance current.
A Reverse Mortgage proceeds are tax free, not considered income and generally do not affect any benefits. Cash out from a Reverse Mortgage is not considered income, because the homeowner is paying interest on the loan. However, every financial situation is different and in some cases, cash out from a Reverse Mortgage can affect Government Benefits, not because of income, but rather balances in bank accounts. Sierra Reverse Mortgage always encourages a consult with a financial advisor.
Distribution of any loan proceeds
A Reverse Mortgage is the most flexible loan on the market. There are several options as to how to receive any loan proceeds.
Lump Sum-you can receive the funds in a sum of cash deposited in a bank account
Partial lump sum with option to receive additional cash later
Set up small monthly deposits to be wired to the account to supplement income, this can continue until the line of credit is dry, or you can set this up for a fixed period of time until you are 65 to maximize your Social Security
Line of Credit- you can just set up a Line of Credit with the ability to draw against the line of credit in the future.
Funds can be wired or mailed to the homeowner. Funds are not completely liquid. It does take about 5-7 business days to receive funds.
Borrowers may access the greater of 60% of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing for all adjustable rate loans. For fixed rate loans, the additional 10% may only be taken at loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. The principal limit is the amount of funds available to the borrower through a HECM loan. Speak with a Liberty advisor for further details.
Option is not available unless the buyer puts down additional down payment than the minimum down payment.
When the Reverse Mortgage becomes due
When the last occupant leaves the home as the primary residence, the Reverse Mortgage will be come due. There are basically 3 options. But none will negatively affect any heirs as Reverse Mortgages are non-recourse loans as they are insured by FHA.
Sell the property and keep any equity
Refinance the loan with another loan
If there isn’t any equity left in the property, the house can be turned back to the bank with no financial penalty or tax
Any of the 3 options much be completed within 12 months of the home being vacated, with no payments required during this time. But must keep taxes and insurance up to date.
What is Reverse Mortgage?