OCALA, FL (352today.com) – Think about every mortgage payment you have made in your life.
Where did that money go?
Part went to interest, and that part is genuinely gone. The rest bought equity. Equity is real and it is yours, and it sits inside the walls of your house where you cannot spend a dollar of it without selling the place or borrowing against it.
You have spent thirty years putting money into a container you cannot open.
There is one kind of mortgage where that is not true. Make a payment on it, and that same amount becomes available to you again as cash you can reach, is always liquid for future needs, and the amount that you paid is not only set aside for when you need it, but the unused portion actually grows and compounds at interest.
I know how that sounds. If your reaction is that a payment cannot both reduce what you owe and be made available for future needs, that is a reasonable reaction and most people have it.
Give me four minutes and I will show you an actual file.
A client of mine, 67 years old
She is still working full time. Every month she sends $1,000 against a loan on her home.
She is not required to send anything. There is no required monthly principal and interest payment on this loan at all. She pays because of what the payment does.
Her $1,000 reduces the loan balance, and it restores that same $1,000 as available credit, which then continues to grow and compound on a tax-free basis.
Not equity locked in the walls. Capital she can draw from that can never be shut down, frozen, nor reduced, and is 100 percent liquid.
So every month she converts earned income into money she can actually reach later. Under her illustration’s assumptions the balance approaches the program floor around year eleven, while the available line builds behind it the entire time. Later that line was modeled as supplemental cash flow in her seventies providing over $250,000 of tax-free and payment-free access, and stress-tested against a serious in-home care event in her late eighties providing for $125,000 per year for 3 years of in-home care.
That last one is the risk almost no retirement plan has an honest answer for.
Now I will tell you what it is
It is a Home Equity Conversion Mortgage. A HECM is the FHA’s reverse mortgage program, federally insured since 1988.
If that word made you tense up, good. It should, and I would rather you hear it from me in the middle of the article than discover it at the bottom.
It is a loan. Interest accrues on it. It must be repaid. There is an origination fee, an FHA mortgage insurance premium both upfront and ongoing, and standard closing costs. Someone who takes this loan and never makes a voluntary payment will watch the balance grow rather than shrink.
And this: She still pays property taxes, homeowners insurance, and upkeep, and she must live in the home as her primary residence. If those obligations are not met, the loan can become due. What goes away is the required monthly principal and interest payment. That is real, and it is not the same thing as “no payments.”
The reverse mortgage you are picturing is 30 years old
The version people remember was genuinely bad, and if it wasn’t, how it was used was. Here is what applies now.
You hold the title. The lender does not own your home.
You cannot owe more than the house is worth. The loan is non-recourse. If the balance exceeds the home’s value, neither you nor your heirs owe the difference. That is what the mortgage insurance premium pays for.
Your heirs are not cut out. They inherit the home and any remaining equity and choose what to do with it.
You don’t have to draw funds if they are available and you can pay the loan balance down to $100.00 and keep the growing line of credit open and growing for as long as you occupy the home as your primary residence and abide by the program rules.
Nobody can talk you into it in one meeting. Independent counseling with a HUD-approved counselor is required before anyone can proceed, and that counselor has no financial stake in the outcome.
There is a financial assessment. You have to show you can cover taxes, insurance and upkeep. People are turned down.
Those last two are the parts people complain about. They exist because the program was rebuilt after the abuses everybody still remembers. The friction is the repair.
How she ended up with this loan at all
She was three weeks from selling her house and renting something smaller. The house had stopped fitting, and selling was the right call.
Her financial advisor, a fiduciary with nothing to sell her, asked whether she had looked at buying instead of renting. She had not. Almost nobody does.
She bought a $220,000 one-level home at a 6.75% note rate with roughly $146,884 cash to close and an initial balance of $83,380. Against paying cash for the same house, she contributed $146,884 instead of $220,000, and the difference was the portion provided by the HECM that will ultimately become a significant piece of her retirement income plan and/or a reserve for aging in place.
Who should not do this
Many people who ask me about this should not. If you may move again within a few years, the upfront costs are real. If borrowing is meant to fix a spending problem, it will not. If leaving the home free and clear to your children matters more than your own liquidity and retirement lifestyle, this may be the wrong tool and that is a legitimate priority. If you cannot comfortably cover taxes, insurance and upkeep going forward, it is not a fit.
See the whole file
I have put the complete case study together and you can have it at no cost. The Third Option Case Study includes:
- Her year-by-year illustration, identifying details changed, numbers untouched
- The rent-versus-own comparison across a full retirement
- What the loan actually cost her
- The voluntary payment schedule and how the credit line rebuilds
- The situations where this is not a fit
No appointment. No obligation. If you read it and decide this is not for you, that is a real answer and a useful one, and it is the most common one.
Or call (352) 875-6907
Rob Ziebart, CMPS, is a retirement educator with Landmark Mortgage Planners in Ocala. NMLS #305375.
This material is not from HUD or FHA and was not approved by HUD, FHA, or any government agency. Landmark Mortgage Planners is not affiliated with or acting on behalf of any government agency. A Home Equity Conversion Mortgage is a loan that must be repaid. Borrowers remain responsible for property taxes, homeowners insurance, property maintenance, applicable HOA charges, and must occupy the home as their principal residence; the loan may become due if these obligations are not met. Interest and mortgage insurance premiums accrue on the outstanding balance. Origination fees, mortgage insurance premiums, and closing costs apply. Voluntary payments are optional; their effect on available credit is determined by program rules and the terms of the individual loan. Figures shown are from an actual client illustration, with identifying details changed and used with permission, and are specific to that client’s age, home value, and the program assumptions in effect when it was prepared. Your figures will differ. Voluntary repayment results assume payments are made as modeled; actual results will vary. Availability of credit line growth and future draws is subject to program rules and continued compliance with loan obligations. Non-recourse protection applies at loan maturity in accordance with FHA program rules. This article is educational and is not financial, tax, or legal advice. HECM strategies should be reviewed in coordination with your full financial, tax, and estate plan. American Financial Network, Inc., DBA Landmark Mortgage Planners. NMLS #237341. Equal Housing Opportunity.