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Reverse Mortgage HECM Loans: The Basics Pros & Cons

We all want more financial freedom, especially as we move into retirement and have more time to spend on vacation and with family. However, with pricy mortgage costs weighing us down monthly, we can struggle to find enough spare funds to put that free time to good use.

Many seniors deal with the stressors of a monthly mortgage by using the equity in their home through a reverse mortgage loan.

Below, we will look at the home equity conversion mortgage pros and cons, how these loans function, and why they might be the solution to your monetary flexibility concerns.

What are Reverse Mortgages

Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds you receive can be used for almost anything, including paying off your existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving your retirement lifestyle

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due.

Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property.

Different Types of Reverse Mortgages

HECM Reverse Mortgage

The most common reverse mortgage is a HECM (Home Equity Conversion Mortgage) because it can often provide the most cash for homes valued under $970,800 and normally has a lower interest rate than a jumbo reverse mortgage. However, HECM’s are limited to home values of $970,800 and below. That means if your house is appraised at $1,500,000, the loan amount will only be calculated using the $970,800 limit.

HECM for Purchase

The HECM for Purchase allows you to buy a home using the equity in the home you are purchasing. Some people use a Reverse Mortgage for Purchase when they are purchasing a new home to downsize from their existing property. Many retirees also use it to relocate closer to friends and family or to warmer weather. A Reverse Mortgage for Purchase requires a down payment, which in many cases can be covered by the proceeds from the sale of the former house and/or savings or other means. The down payment, combined with the Reverse Mortgage for Purchase loan, can be used to buy the new home. That means no monthly mortgage payments* are required, which can leave more money in the borrower’s pocket and improve cash flow.

CHOICE Jumbo Reverse Mortgage – Only at Smartfi Home Loans, LLC!

The CHOICE jumbo reverse mortgage loan is ONLY available at Smartfi Home Loans, LLC!

If your home is valued above the HECM limit ($970,800) and you want to get a higher loan amount by accessing more of your home’s equity, then consider Smartfi Home Loan, LLC’s Choice Jumbo Reverse Mortgage. The Smartfi Choice has no home value limit and can loan up to $4,000,000!

How Do I Apply for a Reverse Mortgage Loan?

It’s simple and easy to qualify for a reverse mortgage:

  • You must be at least 62 years old for a HECM.
    •  (or at least 60 years old for a Smartfi Choice Jumbo Reverse Mortgage)**
  • You must own the property and live in it as your primary residence
  • The property must have an acceptable appraisal 

The borrower’s age, appraised home value, and current interest rates are used to calculate the amount you may receive.

Other factors to know: 

  •  The property must be FHA approved.
  •  Qualification is based on the youngest borrower on the application.**
  •  Primary residence means that you must reside at the property consecutively for six months and one day per year.
  • You must continue to pay property taxes, home insurance, any HOA fees, and continue to maintain the property.
  • Reverse mortgages can be used to pay off existing mortgages on your home. In fact, if you have a traditional mortgage, it is required that you pay off this mortgage (and any additional liens on the property) with the proceeds of your reverse mortgage loan.

Home Equity Conversion Mortgage Pros and Cons

Common Questions

Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so you can understand the facts.

Does the bank own my home? 

No, the bank never owns your home. You remain the owner of your home and can stay as long as you wish. As the homeowner, you must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period.

When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to you or your heirs.

How much can I borrow?

Three factors are considered to calculate how much equity you can access:

  • The age of the youngest borrower 
  • Home value 
  • Current interest rates 

Although we use the home value you initially provide us to calculate the preliminary loan amount, an independent appraiser must visit your home to ascertain the current value of your home. We then re-calculate the loan amount according to this official home value.

What if I have a mortgage already? 

That is absolutely fine.

If you qualify, a reverse mortgage will first pay off your existing mortgage and then give you the remaining proceeds. In fact, many of our borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage.

Will my children lose their inheritance?

Your children have options when it comes to your home. Typically the loan is repaid through the sale of the home. Your heirs can choose to sell the home, pay the loan and receive any remaining equity; or, they can purchase/refinance the home, and pay back the loan with a traditional mortgage.

Does a reverse mortgage require that I make monthly payments?

There are never any monthly mortgage payments. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home.

What you can use your reverse mortgage for?

The tax-free money you receive is intended to support your retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to you!

  • Increase monthly cash flow
  • Pay off an existing mortgage (required as part of the loan)
  • Pay credit card bills
  • Pay medical bills
  • Fund home repairs and improvements
  • Pay property taxes and home insurance
  • Travel
  • Gifts
  • Improve your lifestyle
  • Invest or diversify your retirement portfolio
  • In–home care 

Reverse Mortgage Safeguards

Consumer safeguards are created to ensure you and your family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for your benefit:

Counseling

The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi Choice, or other reverse mortgage,  to undergo third party counseling so that you feel completely comfortable with the process and understand all your options.

No Prepayment Penalty

You can choose to repay the loan at any time without incurring any additional costs.

Non-Recourse Loan

A non-recourse loan protects you from being held liable for the loan beyond the value of the home. Your financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due.

Addressing Other Concerns About Reverse Mortgages

Borrower Responsibilities

Taxes and Insurance

You are required to remain current on your property taxes, home insurance, and if applicable, condo fees and homeowner association fees.

Property Maintenance 

You are responsible for completing mandatory repairs and basic home maintenance during the life of the loan.

Occupancy Requirements 

The home must be your principal residence which means you need to live in your home consecutively for six months and one day of the year.

Learn More About Reverse Mortgages With Smartfi Home Loans

The Smartfi Difference

In 1911, Smartfi Home Loans, LLC began as Bankers Guarantee in Ohio, with a mission to serve locals from the beginning of their mortgage loan, to the very end. Under our new name, Smartfi Home Loans, LLC, combines our decades of experience, and the trust we’ve accumulated, with tailored products and a streamlined platform to meet the needs of American seniors today, tomorrow, and long into their retirement.

With us, you always come first. We focus on cultivating our relationship with you to ensure that you have what you need to realize your dreams. Our mortgage experts are your dedicated resources to walk you through the process with ease, answer all your questions, and truly give you a thoughtful and personal experience.

Call (877) 816-6706 or contact us online and we’ll help you find out how much cash you could qualify for.

*Borrower must pay property taxes, insurance, HOA fees and maintain the property.
**Age requirements differ by product and state.
These materials are not from, and have not been approved by, HUD, FHA, or any government agency.
Smartfi Home Loans, LLC does not guarantee the accuracy of any information. These materials do not pre-qualify you for any loan program and details should be verified independently with one of our Smartfi Specialists. All home lending products are subject to credit and property approval. Rates, program terms and conditions are subject to change without notice. Not all products are available in all states or for all amounts. Other restrictions and limitations apply.

Smartfi Contributor

Our Smartfi Contributors are made up of a collective group of mortgage industry professionals, who share their personal opinions of the mortgage industry, topics, and various products. These are the express opinions of the Smartfi Contributor, and the article is based on their opinion and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by Smartfi Home Loans, LLC.

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