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Reverse Mortgages have been around since the 1980s, and while 40 years ago they were may have not been so consumer friendly, today Reverse Mortgages have evolved into a fantastic loan for seniors all over the United States.
Most Reverse Mortgages are insured by the FHA, these Reverse Mortgages are known as Home Equity Conversion Mortgages, (HECM for short). However, there are some proprietary Reverse Mortgages that are not insured by the FHA, but do have similar features to the HECM and also allow a borrower to access very large amounts of equity with what could be considered a JUMBO Reverse Mortgage.
In general a Reverse Mortgage is very much like a traditional type of mortgage in that the value of the house is one of the factors that used to determine how large of a loan you can get. Likewise, a lien is placed against the house and the loan has an interest charge based on the balance and the interest rate. Also, as with a traditional mortgage, the borrower can sell their home and payoff the lien and the equity still belongs to the borrower. The same is true if the borrower were to pass away; the heirs can inherit the house and payoff the loan and the equity in the home at that time still goes to the heirs. So, very much like a traditional mortgage.
How is a Reverse Mortgage different than a traditional mortgage: There are a few ways the HECM is different, and the main difference is that the borrow has a minimum monthly payment of ZERO ($0.00); the borrower can make payments if they want to, but they never have to…ever, so long as they comply with the simple guidelines of having a HEMC, such as you must live in the home for more than 6 months out of the year. You must protect the home and by “protect” I mean you must pay your home owner’s insurance and your property taxes; likewise you must take care of your home (don’t let it become condemned or abandoned), and comply with your Home Owner’s Association rules if your neighborhood has and HOA.
Some other ways a HECM is different is that with a HECM you normally need to have at least one of the home owners over the age of 62 to qualify (there are some exceptions). Also, the HECM is not a high leverage loan, and what I am saying is you are required to have a large equity cushion built up in your home…For example: If your home is worth $800,000, you would normally need to have between 300k to 500K or more of equity built up (depending on your age and the interest rate). This is because the loan amount may be limited to a maximum that is in the range of approximately 45% to 75% loan to value (again depending on your age and the interest rate). The same is true if you are purchasing a home with a Reverse Mortgage; you could be looking at buying a home and after making a large down payment (equity), the reverse covers the rest and you are done making house payments on your new home. Since FHA is insuring the HECM loan, FHA insists that you do not borrow too much and that you keep a large amount of equity in your home.
Another special benefit with a Reverse Mortgage is that the home owner can elect to have a fixed interest rate or a variable rate for a large line of credit. If you do choose the line of credit HECM, you can systematically draw money off the line of credit or take large chunks of money as you need it (note: there are some restrictions in the first 12 months that may keep you from spending a portion of all the money right out of the gate). Keep in mind that you never are required to draw more money off the line of credit and that you can let it sit there as a type of tax free emergency resource that never expires. Another nice benefit is that the unused portion of the line of credit HECM will increase in capacity as you get older (they can raise your limit on the line of credit every year); this is true, even if the value of the home declines.
These are just some of the highlights and benefits of a Reverse Mortgage. Please call now or schedule a private consultation and we can talk about your particular case and explore what option may be available. (Click the “Get Answers” link on the home page to schedule a consult).
Many homeowners have found that a reverse mortgage loan is a great way for them to take advantage of the equity they have built up in their homes.
A reverse mortgage loan is different than a traditional mortgage. With a traditional mortgage loan you must make monthly mortgage payments, but with a reverse mortgage the borrower has the option to never make a loan payment. The HECM borrower also can choose a variety of ways to receive their loan proceeds. The lender can pay you monthly installments, a one-time lump sum payment, a line of credit or a combination of a line of credit and monthly installments. The money that you receive is dependent on your age, the value of your home and the interest rate.
One of the great advantages of a reverse mortgage loan is that you are not required to pay the loan back until the home is no longer your primary residence or you fail to maintain the home, or fail to pay property taxes and/or homeowner's insurance or do not otherwise comply with the terms of the loan. For more information on when a reverse mortgage loan comes due click the following link: What about Repaying a Reverse Mortgage Loan.
If you’re aged 62 or older and own your home you might be eligible for a reverse mortgage loan (some exceptions down to age 55). Contact us to find out more about reverse mortgage loans and ways to make it work for you, or apply now and start the process of tapping the equity in your home.
Check out these pages for more information about reverse mortgage loans.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.