How is a reverse mortgage (or HECM) different if you currently have a mortgage versus owning your home free and clear?
Currently, as long as you qualify for the program, the two different scenarios are almost identical in process. The only difference is when you do have a mortgage because it adds an additional step to the process and impacts the funds you will have available at closing.
Here are a few examples.
Own Home Free and Clear
Michael (78) and Julie (64), from New York, own their $300,000 home free and clear. . Believing that the economy is about to take a downturn, they decide to lock in their home value at a higher value now than if the economy does turn south.
After calling a licensed expert and going through the required third-party counseling and financial review, they close their loan and pay all of their closing costs as opposed to rolling it into the amount being financed.
The reverse mortgage is calculated off of the younger borrower, which in this scenario is Julie. They get a reverse mortgage line of credit in the amount of $159,000. They do not have an immediate need for the cash so they keep the funds in the line of credit – allowing them to increase in value each year.
Owe Mortgage on Home
Russ (66), from Wyoming, has been making payments on his home in Cheyenne for the last 20 years. His home has been appraised for $200,000 and his mortgage balance is roughly $50,000. He decides that he would like to do a reverse mortgage to pay off the rest of his existing mortgage and have some money to put into an emergency fund. At this point, the application process is identical to what Michael and Julie went through. Russ will still have to attend a mandatory 3rd party counseling session and also have his credit history looked at to determine if he can qualify and for how much.
Here is where the difference is between the two scenarios. Before he can receive his proceeds, the existing mortgage must be paid off. So in this scenario with Russ, the outstanding $50,000 is paid off first. This leaves Russ with $56,000 to use however he wants. Now, if Russ did not have a mortgage, he would have qualified for roughly $106,000. As you can see, the mortgage itself is paid off with what would have been available proceeds. Russ can continue to make monthly payments to the reverse mortgage to pay towards the money he used, but he is not required to.* That is one of many benefits of the HECM.
Paying off the mortgage does not mean that the mortgage balance is now gone; it becomes part of the reverse mortgage loan and is accruing interest yearly until the loan becomes due. When the loan becomes due Russ would need to pay back the original amount paid off, plus any interest that has built up over time. He’ll also pay off any amount of the remaining $56,000 that he used.
In the first scenario with Michael and Julie, when the loan comes due, all they would need to pay back is any money they used from their credit line.
The program itself can be beneficial whether you have a mortgage or not and whether you need the money right away or not. However, it depends on how you want to use the reverse mortgage. It is always best to contact a licensed expert and explain what your goals are so they can tailor the loan to your present or future needs.
*Homeowner is still responsible for taxes, insurance and property maintenance.