The first known Reverse Mortgage was written in 1961 in Portland, Oregon, to help a widow save her home after losing her husband, a popular coach. In 1969, the concept reached the U.S. Senate, when the late Senator John Heinz proposed a concept that evolved into today’s Home Equity Conversion Mortgage or HECM. The more common term, Reverse Mortgage, is easier for most people, though it often conjures up self-imposed ill feelings.
Fundamentally, a Reverse Mortgage is just another property mortgage and can be used for similar purposes, including purchasing or updating a home, or replacing an existing mortgage loan. The major difference between the HECM and a Traditional Mortgage is seen in the required payment schedule. Rather than a monthly Principal and Interest payment, HECMs have no required payment schedule for so long as the owner uses the home as a primary residence. This renders the Reverse Mortgage a valuable tool in long-term Personal Financial Planning.
Far too many potential customers for Reverse Mortgages believe that “It’s just a way for the bank to take your property.” While incorrect, this belief arose out of the poor introduction of the product to consumers. Hiring celebrities to pitch the new concept, disregarding most common-sense explanations, and granting people large sums of cash with no justification, all led to horror stories the public has yet to overcome. Today, the product’s application, as well as its marketing, has vastly improved.
All Reverse Mortgages have a few common characteristics. One of the most misunderstood is that any and all funds paid out to the homeowner(s) are tax-free. Whether or not the homeowner receives any cash from the HECM, the mortgage will not be required to be repaid until the home is abandoned, whether by selling, moving, or by the death of the owner(s).
Further, once HECM repayment time comes (for whatever reason), the loan will be repaid, with any surplus of the sale price over the HECM balance refunded to the owner or owner’s estate at closing. Should the sale price be less than the HECM debt, no money is due, as this event is fully insured during the life of the HECM.
Americans are homebodies and are generally attached to their long-time residences. Enhancing the ability of older Americans to stay in their homes longer is a fundamental goal of many peoples’ long-term planning. While the HECM requires one owner to be at least 62, Certified Financial Plannersâ will assist Americans of all ages in formulating a plan to satisfy the multiple goals of living a comfortable and safe retirement, in the surroundings they prefer.
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