What is a reverse mortgage? In the broadest sense, a properly designed reverse mortgage that is utilized appropriately can be a key strategic element in your overall retirement plan.

The Home Equity Conversion Mortgage, or HECM, is by far the most common reverse mortgage product utilized by retirees and soon-to-be retirees, and the product that we will focus primarily on in this series of videos. A HECM is a reverse mortgage product insured by the federal government that allows homeowners age 62 and older to convert a portion of the equity in their homes into current or future loan proceeds, and is federally insured by the U.S. Department of Housing and Urban Development (HUD). In many respects, the reverse mortgage is similar to a traditional mortgage – the homeowner retains title to the property, and can pay off or refinance the reverse mortgage at any time, should they wish to. Similar to traditional mortgages as well, the homeowner remains responsible for the payment of standard property-related expenses, such as property taxes, insurance and maintenance.

The reverse mortgage however provides unique, flexible options for a homeowner to select loan proceeds, including

1) lump-sum payment (similar to the “cash-out” refinancing of a traditional mortgage);

2) a “tenure” payment, providing for indefinite equal monthly payments to the homeowner;

3) a “term” payment, providing for equal monthly payments over a specific time period to the homeowner;

4) a line of credit available to the homeowner, which is structured to grow over time, based on the loan interest rate;

5) a modified tenure, which is a combination of the line of credit and tenure options; and

6) a modified term, which is a combination of the line of credit and term.

The line of credit option, number 4 in the list, is the most popular choice of homeowners, providing them the flexibility to access the reverse mortgage proceeds if and when needed. In part 4 of this series, Why a Reverse Mortgage? An Overview of Potential Uses, we discuss how this option can play an instrumental role for retirees to manage a successful retirement, including

1) managing sequence of returns risk (which, when executed appropriately, can also contribute to maximizing the residual value of your estate for your heirs);

2) having liquidity available for unexpected expenses;

3) providing funds for giving during your lifetime to family, friends and causes that have great meaning to you, versus waiting until you pass; and

4) thoughtfully funding memorable life experiences with friends and family, all with an eye on proper planning to your retirement goals.

Importantly, a reverse mortgage also provides the following benefits:

- It is completely non-recourse to you or to your heirs – if, at the time that you pass or cease to occupy the property as your primary residence, your home is worth less than the principal balance of the mortgage of your loan, you or your heirs may simply turn the keys back to the lender, with no liability to cover the difference between the reverse mortgage loan balance and the value of the home;

- You have no monthly payment obligations or any obligation to repay any loans taken under the reverse mortgage, including any lump sum payments, periodic payments or draws on the line of credit, though of course you still remain responsible for payment for taxes, insurance and standard property expenses;

- You retain title to the property, and at any time, you (or you heirs at your passing) may sell the home, refinance the home or pay off the reverse mortgage on the home. There is no transfer of title to the lender, unless 1) you do not pay the property taxes and insurance and maintain the property as all lenders generally require; or 2) at the time you cease to live in the property as your primary residence, the loan balance of the reverse mortgage is in excess of 95% of the fair market value of the property, and your heirs choose to give the property back to the lender and not pay off or refinance the property.

This is a lot of information, and with the flexibility of reverse mortgages to achieve your goals, there comes complexity. We hope that the next installments of this series will help break down that complexity and that you come away with a balanced understanding of how reverse mortgages work, as well as their benefits and costs, and of course how they integrate into a thoughtful long-term retirement plan. We are also here to answer any questions that you may have, and to discuss with you how a reverse mortgage can play a role in your retirement strategy specifically.