Getting a reverse mortgage will give you access to much of your untapped home equity. However, the idea of using up home equity and running out of cash at some point can be frightening to many potential borrowers. Rather than worry about “what if” possibilities, take a closer look at the various types of payment options and ways that you can receive your money from a reverse mortgage.
Unlike a regular home mortgage, the Home Equity Conversion Mortgage (HECM) does not require you to make monthly payments during the course of the loan. Just make sure to pay your property taxes, homeowner’s insurance, and maintenance expenses in order to prevent the loan from coming due before you’re ready.
The Fixed Rate HECM: One Lump Sum
Once you receive your proceeds from a reverse mortgage, you can choose to use that money however you see fit. If you decide on a fixed rate reverse mortgage, you will receive a single payment that you can choose to use as you wish. Because this is a fixed rate loan, the interest on the debt will accrue at a predictable pace. Some people use this lump sum of money to pay for large home improvement costs or medical bills. Or, for the sake of long-term financial security and sustainability, some borrowers choose to save their reverse mortgage proceeds as an extra emergency fund.
The Adjustable Rate HECM: Lump Sum, Monthly Payments, Line of Credit
Unlike the fixed rate loan, the adjustable rate HECM allows you to receive your money in three different ways. Like the fixed rate version, you can take your money as a lump sum, but you can also choose to receive monthly payments or gain access to a flexible line of credit that can grow over time if there are unused funds in it. By choosing a line of credit, you will be able to keep your funds in reserve and draw on them as needed.
If you decide to receive monthly installments, you will be able to receive the same set payment each month for as long as you choose. Regardless of your home’s current value, the payments will remain the same. You can schedule payments to last for a few years or to continue as long as you live in the home and honor other loan obligations.
The HECM as a Non-Recourse Loan
When borrowers wonder about running out of money, they often wonder how they will pay back the debt from a reverse mortgage as well. Thankfully, reverse mortgages are non-recourse loans – let’s explain what that means in detail.
After closing, borrowers will be expected to pay a mortgage insurance premium (MIP). While fees and payments are never fun, this particular charge serves a valuable purpose that may pay off immensely once your reverse mortgage comes due. But, to understand the utility of the MIP, it’s important that you first understand the value of the HECM as a non-recourse loan.
In order to protect borrowers from unforeseen debt, the federal government decided to ensure that no matter how much debt is accrued on the balance of a reverse mortgage, borrowers will never be held responsible for paying more than the value of the home at the time the loan comes due and payable. In other words, you will always be able to sell your home and use that money to pay back the loan – this is why reverse mortgages are called non-recourse loans. However, in order to afford this luxury, money must be collected from somewhere, and that’s where the MIP comes in.
Benefits of the Life Expectancy Set Aside (LESA)
We mentioned previously that it is important for HECM borrowers to stay current on loan obligations. For borrowers who are worried about running out of money, this may be a concern.
Thankfully, as part of the relatively recent Reverse Mortgage Stabilization Act, the federal government decided to add an extra safeguard to assist certain borrowers. During the reverse mortgage process, borrowers will undergo a financial assessment to determine their willingness and ability to uphold their financial responsibilities of the loan. Although a reverse mortgage does not require any monthly payments, borrowers must stay on top of their property taxes, homeowners insurance, and maintenance expenses to make sure that the loan does not come due before they are ready.
However, if financial assessment determines that a borrower’s credit history may be problematic, a Life Expectancy Set Aside (LESA) will be issued in order to put aside funds for the future payment of property taxes, homeowner’s insurance, and maintenance expenses. So, if you receive money from a reverse mortgage, it is highly recommended that you save some of it to cover these costs if you think they may become a burden. Thankfully, with a LESA or partial LESA in use, this will be done for you. Essentially, a LESA can help to prevent the loan from coming due before you are ready. Borrowers worried about running out of money can take solace in the fact that there are measures in place to protect them.