Enhance your financial security when you consider the benefits of a home equity conversion mortgage, also known as a reverse mortgage. The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program, which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements, or travel while they are still able.
Home Equity Conversion Mortgage (HECM)
A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free cash without having to sell the home, give up the title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Proceeds can be used for anything.
- Pay Off Your Existing Mortgage
- Continue to Live in Your Home and Maintain Title
- Pay Off Medical Bills, Vehicle Loans or Other Debts
- Improve Your Monthly Cash Flow
- Fund Necessary Home Repairs or Renovations
- Build a “Safety Net” for Unplanned Expenses
- Eliminates Your Existing Monthly Mortgage Payments
- Loan Proceeds Are Tax-Free and Can Be Used Any Way You Choose
- Heirs Inherit Any Remaining Equity after Paying off the HECM Loan
- The HECM Loan Is FHA Insured
Home Equity Conversion Mortgage (HECM) For Purchase
This allows those 62 years of age and older to purchase a new primary residence and obtain a reverse mortgage in a simultaneous transaction with no monthly mortgage payments. How is this done? It is accomplished by allowing buyers to combine the reverse mortgage proceeds with a down payment from their current home sale or other assets.
What Can You Purchase?.
- Purchase a Primary Residence Suitable for Your Current Needs
- Purchase a Home in a Senior Housing Community
- Move into a New Home That’s Easily Accessible with Modern Amenities
- Move to a Smaller, Easier-to-Maintain Home
- Relocate Closer to Friends and Family Members
FAQ About a Reverse Mortgage
What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. 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. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
What are some of the features of the loan?
Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits.
You retain the title to your home, and you don’t have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid. You can also live part time in a second home as long as the home that the reverse mortgage is on is your primary residence.
What role does FHA and HUD play?
FHA offers and insures through HUD the majority of reverse mortgages, known as the Home Equity Conversion Mortgage or HECM, making it the most highly regulated mortgage available. HUD insuring the reverse mortgage provides advantages including:
Guaranteeing the Funds Are Available for You
Guaranteeing the Lender against Default or Shortfalls
Keeping the Interest Rates Lower, the Interest Rates Have Historically Been Lower Compared to Other Mortgages
Providing a Line of Credit Growth Rate (Available Only with Reverse Mortgages)
Ensuring as a Reverse Mortgage It Is a Non-Recourse (No Personal Liability) Loan
Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home.
Can I apply for a HECM reverse mortgage even if I did not buy my present house with FHA mortgage insurance?
Yes. You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage.
What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a two to four unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must 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. With a reverse mortgage, you are required to pay real estate taxes, utilities and hazard and if required flood insurance premiums. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Will we have an estate that we can leave to heirs?
Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. An FHA Reverse mortgage has a “non-recourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due. There is no personal liability, meaning that borrowers or their heirs don’t have to come up with the difference if the loan balance is higher than what the home is sold (at fair market value).
Borrowers are not leaving any debt to their children. Remember, you can take the proceeds from the reverse mortgage and gift it to your children or heirs. However, if you or your heirs want to retain ownership of the home, you usually must repay the loan in full – even if the loan balance is greater than the value of the home. At the time of sale if the home is sold for more than the loan balance, the borrower(s) or their heirs receive the difference. The bank does not keep the difference.
What are my responsibilities?
Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.
How much money can I get from my home?
The amount varies by borrower and depends 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; and
Initial Mortgage Insurance Premium
If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow
Should I use an estate planning service to find a reverse mortgage lender?
FHA does not recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. This group is an FHA-approved lender and a member of the Better Business Bureau
How do I receive my payments?
You may be eligible for one of the following 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.
Two Lump Disbursements – the first one at closing and second one at 13 months.
What if I change my mind and no longer want the loan after I go to closing?
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
My Understanding is that the unused balance in the line of credit option has a growth feature. Does that mean I’m earning interest?
No, you’re not earning interest like you do with a savings account. The growth factor, which is equal to the current interest rate plus 1/2%, allows the funds in your line of credit to grow larger.
How can I use the proceeds from a reverse mortgage?
The proceeds from a reverse mortgage can be used for anything, whether it’s to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a “dream” vacation, cover property taxes, and prevent foreclosure.
Are There Any Special Requirements to Get a Reverse Mortgage?
As long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. There are no special incomes or medical requirements.
Why Do I Need to Get Counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
You can seek counseling from a local HUD-approved counseling agency, or a national counseling agency. Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone. Services rendered by HECM counselors are free or at a low cost. Many agencies will allow you to pay to cost of counseling at the time of closing.
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. Here are some national agencies that you can contact by phone:
Consumer Credit Counseling Service of Greater Atlanta (866) 616-3716
National Foundation for Credit Counseling (866) 698-6322
Money Management International (877) 908-2227
National Council on Aging (800) 510-0301
DebtHelper (800) 920-2262
QuickCert, Inc. (888) 383-8885
What about the closing cost and fee associated with a reverse mortgage?
We hear often that closing costs are considered expensive or high compared to a conventional loan. This is not true at all. The difference comes down to FHA Mortgage Insurance Premium which is a huge protection for seniors and their family. All Fees are regulated by HUD. HUD does not allow marked up or “junk fees,” borrowers only pay the actual costs which is another protection for the senior.
Note that the fees, other than the appraisal and possibly the counseling fee are wrapped into the loan so there are no other out of pocket costs. Being clear and having an understanding of the reverse mortgage costs helps you make better decisions and takes the fear away from the reverse mortgage. Please have your reverse mortgage specialist review all cost with you.
What if I have an existing mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
Will I lose my government assistance if I get a reverse mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, you must be aware of some restrictions in order to protect your benefits. Please let your reverse mortgage specialist and HUD approved counselor know that you are on Medicaid. Additionally, to be safe, you should contact a Medicaid expert or an agency on aging.
For Family Members and Friends
Here are some questions that family and friends should ask and strongly consider in helping a senior decided if a reverse mortgage is right for them:
What are the senior’s desires?
What about their comfort and happiness?
Do they really want to sell?
Do they really want to live in senior housing?
Would they really be comfortable living with a relative?
Would they really be happy if they moved out of the home and community they are familiar with and comfortable in?
What impact would receiving financial assistance from a child have on the child’s financial situation?
What is going to give the senior their security, independence, dignity, and control?
Being familiar with their surroundings, their community, having the bank and grocery store down the street can be a huge comfort to a senior. The choice for a senior to stay in their home allows a senior to still feel independent and stay where they are most comfortable. They money from the reverse mortgage will give them additional income and resources to hire the help they need or pay for maintenance for their home, thus allowing the senior to stay in their home and not feel they are a burden on family and friends.
Moving in with an adult child can mean a loss of independence, dignity, and control for a senior. There could be additional stress and more of a financial burden on the child. Having a child provide financial assistance through just providing funds could have a negative impact on both the senior and the child.
The senior will have lost some of their independence and dignity by depending on their child. The child’s situation may change and they may not be able to afford the financial assistance in the future. Additionally, without the extra income from the reverse mortgage many seniors don’t take care of themselves or their homes the way they should because they just don’t feel they have the money.
Call Today to Speak to a Reverse Mortgage Specialist
While a reverse mortgage isn’t right for everyone, everyone should at least know the real facts to determine if a reverse mortgage is right for their situation. You don’t go the plumber for your health problems. So going to the media, politicians, a real estate agent, your neighbor, or anyone else who doesn’t specialize in reverse mortgages does not allow you to make an educated decision about reverse mortgages. Learn the facts from a true reverse mortgage expert and then utilize your required counseling session to confirm those facts.