What Is a Reverse Mortgage?

What Is a Reverse Mortgage?

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

The most common type of reverse mortgage is a Home Equity Conversion Mortgage, or HECM, and is insured and regulated by the Federal Housing Administration (FHA). The FHA provides certain protections to the borrower, such as requiring counseling and a comfort in knowing that when the loan comes due and payable, you’ll never owe more than the value of the home.

Unlike a traditional mortgage and home equity line of credit, a reverse mortgage provides payment options – meaning that you can choose whether or not to make payments throughout the life of the loan - monthly mortgage payments are not required. Of course, borrowers still must pay property taxes, insurance, HOA fees and costs to maintain the property.

If you’re looking for a way to supplement retirement income without selling your car, stocks, or bonds, a Home Equity Conversion Mortgage (HECM), also known as a Reverse Mortgage, might be the right solution for you. As the cost of healthcare, basic living necessities and home maintenance rises, more retirees and senior citizens across different states are utilizing Home Equity Conversion Mortgages.

In this article, we’ll explain why the Home Equity Conversion Mortgage (HECM) can be the most popular approach to home equity borrowing for people who want to enjoy a comfortable retirement. We will also detail the eligibility requirements by every FHA-approved lender and whether it’s an effective strategy for refinancing your existing mortgage.

Home Equity Conversion Mortgage (HECM): What Does It Mean?

HECM reverse mortgages allow homeowners, age 62 and over, to borrow against their home equity, effectively providing them with a cash lump sum, line of credit or a steady stream of monthly payments that they don’t have to pay back until they move out of their primary residence, pass away or fail to comply with loan terms. HECM loans can be more expensive than traditional mortgage loans, though they come with extensive safeguards for retirees.

Because the Federal Housing Administration (FHA) insures HECM loans, borrowers may face stricter loan limits compared to private reverse mortgages; while HECM payment options may be more flexible - the actual terms of a HECM are stricter, the maximum home value allowed for calculations is capped by the FHA, currently set at $1,209,750 (as of 1/1/2025).

You can use HECM loan proceeds to eliminate the monthly mortgage payments* due on your existing home loan (required), enjoy life in retirement, or for many other needs. Lenders will provide multiple options for loan proceeds to be disbursed:

• Receive the reverse mortgage proceeds from your home equity as a lump sum payment.
• A line of credit that allows you to draw from it as needed.
• Receive monthly payments either for a set period or as long as you live in the home.
• Combine payout options for the most flexibility. You can combine any of the above options to suit your needs, for example, a small lump sum upfront, monthly payments, and a line of credit for unplanned expenses and emergencies.

How Does a HECM Work?

A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan. When you take out a reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, you are not required to make monthly mortgage payments*. The loan must be repaid when you no longer live in the home or fail to meet the terms of the loan. Interest and fees are added to the loan balance each month and the balance grows. You are required to pay property taxes and homeowners insurance, use the property as your principal residence, and keep your house in good condition.

With a reverse mortgage, you can use the equity in your home to receive loan proceeds in the form of a lump sum, monthly payments, a line of credit, or a combination of these. As with any other loan, terms and payouts are determined by the product, fees and interest rate.

How is the Loan Repaid?

Reverse mortgage loans generally must be repaid when you move out of your home or pass away. However, the loan may become due sooner if certain terms are not met, such as if the home is no longer your primary residence, if you fail to pay property taxes or homeowners insurance, or if the home is not properly maintained. One of the great advantages of a reverse mortgage is that it is a non-recourse loan, meaning that when the loan becomes due and payable, you will never owe more than the home is worth. Additional, your estate/heirs have several options for repayment. These features can offer peace of mind, allowing you to enjoy your retirement years free from loan payments and without placing a financial burden on your heirs.

Is a HECM FHA-Insured?

HECM loans are the only kind of reverse mortgage that the Federal Housing Administration (FHA) insures. Borrowers will need to meet FHA requirements to be eligible for a HECM program, as lenders will fund the reverse mortgage loans and have them insured by the FHA.

Are HECMs the Same as Proprietary Reverse Mortgages?

Proprietary reverse mortgages share many similarities with HECM loans but are not insured by the FHA. Borrowers who have home values above the FHA's lending limit or who's home may not qualify for the HECM may opt for a proprietary loan. These loans don’t carry FHA insurance; however, they tend to share the same consumer-centric safeguards, such as the non-recourse feature.

A Step-by-Step Guide to the HECM Process

At Smartfi Home Loans, we’ve simplified the process of getting a reverse mortgage into a few straightforward steps. First, we'll help you determine the reverse mortgage solution that best fits your needs. Then, we’ll guide you through the next steps:
Step 1 - Submit an initial inquiry
A Smartfi reverse mortgage loan officer will review your goals to determine what loan options are best for you.

Step 2 - Complete HUD-approved counseling
To ensure you have the knowledge and tools to make an informed decision, you will need to complete a 1–2-hour counseling session with an independent HUD-approved counselor, either over the phone or in-person.

Step 3 – Submit your completed application
Once you have your counseling certification and required documentation together, you will submit everything to your Smartfi specialist.

Step 4 – Appraisal and underwriting
Your home will be appraised by an FHA-approved appraiser, as a requirement of the loan. Once complete, the loans documents are reviewed and finalized for closing.

Step 5 - Closing and funding
Upon underwriting approval, your final loan documents will be delivered to a notary for signing. Once your closing documents are signed (and, if applicable, your three-day rescission period is over), the funds will be released to you.

A rescission period is a time when you can cancel the loan with no penalty.

Who is a HECM Good For?

A reverse mortgage is ideal for many retirees. HECM loans can be a great way for seniors who enjoy total ownership of their homes, or have a high amount of home equity, to supplement their retirement income or add a financial resource to their portfolio. The loan can be used strategically throughout retirement or for more immediate needs, the decision is up to the you.

Seniors Who Want to Stay in Their Homes

HECMs and other reverse mortgage products allow borrowers to refinance their existing mortgages and in many cases enjoy a more financially stable and secure retirement.

Until you move out of or permanently leave the home or fail to meet the terms of the loan, you won’t have to worry about required monthly mortgage payments. Of course, borrowers must continue to pay pay property taxes, insurance, HOA fees, and maintain the property.

American Homeowners Looking to Supplement Their Income

A HECM allows you to convert part of your home equity into cash without having to sell the home. The proceeds can be received as a lump sum, monthly payments, or a line of credit. It's especially useful for people with limited retirement savings or those facing rising healthcare costs.

Borrowers Who Want to Pay Off Higher-Interest Debt

For a retiree on a fixed budget, carrying multiple debts that require monthly payments can be overwhelming and feel never-ending. Whether you have high-interest credit card or no-interest medical debt, if your monthly payments are pushing the limits of your monthly budget, a reverse mortgage may offer the breathing room you need.

HECM Loan Requirements

To be eligible for a HECM reverse mortgage, as a borrower:

• You or your spouse must be age 62 or older (a non-borrowing spouse may be under age 62⁴)
• You must own your home and live in it as your primary residence
• You must have sufficient equity in your home
• You must pass product specific residual income and credit requirements
• You must complete reverse mortgage counseling by an independent, HUD-approved counselor

Summary

A reverse mortgage should be used responsibly and is not the right choice for everyone, but it may be a good option for those who are near or in retirement wanting more financial freedom and stability. Before making this decision, it is recommended that you talk to your family members and/or financial advisor.

If you are ready to get the process started, contact us today at (858) 389-4214.

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