Reverse Mortgage – Home Equity Conversion Mortgage (HECM)
A Reverse Mortgage is a mortgage offered by the FHA (Federal Housing Administration) that allows you to withdraw some of the equity in your home to use for anything you need. It is intended for older Americans, 62 years old and above, to give them greater financial security and cover costs that may exceed their savings, social security, and pensions.
If you own your home, or are close to paying off your home, you have built up equity with all the mortgage payments you have made over the years. You can cash out that equity in the form of a reverse mortgage home loan. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.
Reverse Mortgage Qualifications
You must be a homeowner 62 years of age or older.
You must own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.
You must live in the home.
You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan.
You can find a HECM counselor online or by phoning (800) 569-4287.
Your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower.
HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
A Reverse Mortgage or a Home Equity Loan?
A second mortgage or a home equity line of credit is similar to any home loan. Borrowers must have adequate income to qualify for the loan and then make monthly payments on the principal and interest. A reverse mortgage is different because it pays you – there are no monthly principal and interest payments. However, with a reverse mortgage, you must also pay real estate taxes, utilities, and hazard and flood insurance premiums.
Will I still be able to leave my home to my heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
How much money can I get from my home?
The amount you may borrower will depend on:
- Age of the youngest borrower
- Current interest rate
- Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price
- Initial Mortgage Insurance Premium–your choices are HECM Standard or HECM SAVER
You can borrow more with the HECM Standard option. In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow. Many online reverse mortgage calculators can provide you with an estimate of the amount of funds you can borrow.
Should I use an estate planning service to find a reverse mortgage lender?
My Loan Advisor does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. You can locate a FHA-approved lender by searching online at www.hud.gov or by contacting an HECM counselor for a listing. Services rendered by HECM counselors are free or at a low cost. To locate a HECM counselor Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
You may also enter your information in the form at the right, and a lender will contact you about your reverse mortgage request.
How do I receive my payments?
You can select from five payment plans:
- Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term- equal monthly payments for a fixed period of months selected.
- Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
What if I change my mind and no longer want the loan after I go to closing? How do I do this?
By law, you have three calendar days to change your mind and cancel the loan. This is called a three day right of rescission. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place. In most cases, the right of rescission will not be applicable to HECM for purchase transactions.