How it works...
A Reverse Mortgage or Home Equity Conversion Mortgage (HECM) is a HUD/FHA-backed program that allows a borrower to access a portion of the home’s equity to obtain funds without having to make monthly mortgage payments. In many cases, these funds are tax-free, depending on your individual financial situation. Consult your accountant to confirm.
If you are 62 years of age or older and looking for ways to supplement your retirement income, a Reverse Mortgage loan may be the answer. Some of the benefits you may enjoy include:
- Pay off your existing mortgage
- Pay off medical bills, auto loans or other debts
- Fund necessary home repairs
- Build a safety net for unplanned expenses
A Reverse Mortgage provides you the freedom of continuing to live in your home, without a monthly mortgage payment.
- The youngest borrower on title must be aged 62 years or older
- Home must be your primary residence
- Must be able to pay off any existing mortgages with the Reverse Mortgage loan proceeds
- Property must be a single family dwelling, two to four unit with one of the units owner-occupied, FHA-approved condo or manufactured home that meets FHA guidelines
Full loan repayment is not due as long as borrowers meet the following obligations:
- The home continues to be your primary residence.
- The property taxes/homeowner’s insurance must remain current.
- The home is maintained to HUD/FHA standards.
If a borrower decides to vacate the home, the borrower or the heirs may sell the home and receive any net proceeds after the mortgage payoff is considered. Further, the borrower or the heirs will not be required to pay more than the value of the home, at the time the loan is repaid. (see “Myths vs Realities” section below)
HOW A HECM LOAN FUNCTIONS
These are safe, secure loans that allow you to access your home’s equity, in order to get cash to fund your retirement.
The amount you receive is based on the value of your home, the age of the youngest borrower and current interest rates.
Some of the funds available to you may be restricted or held back for one year after the closing.
After closing, your Principal Loan Amount or PLA with grow, monthly, at an amount based upon the interest rate chosen by the borrower. For example, a $100,000 PLA will grow approximately $5,000+ in the first year and so on. As the PLA grows, so does the accruing interest.
RECEIVING YOUR FUNDS
The Reverse or HECM is available as either a fixed rate or as an adjustable rate loan. Of course, the fixed rate can never change. However, the adjustable rate options can either adjust monthly or annually, depending on the program chosen by the borrower.
MYTHS vs REALITIES
A common myth or misconception about Reverse Mortgages is that people have been led to believe that the home is no longer theirs, that it is the reverse mortgage lender’s home, after closing. – On the contrary, borrowers maintain title to their property, just as they did, prior to obtaining the Reverse Mortgage. As long as one borrower is occupying the property, paying the property taxes/homeowner’s insurance and maintaining the property, no one can take the home away from the borrower.
Another common myth is that when all borrowers are no longer living, the Reverse Mortgage lender “swoops” in and takes the home immediately. – In actuality, the heirs simply notify the lender that the borrowers have passed away and that they intend to list the home for sale. With good communication, updates, etc., the Reverse Mortgage lender will work with heirs and allow up to one year for them to sell the home. If the heirs wish to keep the home, then they have the option to refinance the loan balance with an independent lender of their choice. If there is no communication between the heirs and the Reverse Mortgage lender and the lender discovers that the borrowers are no longer living or the home has been vacated without notice, the process for the lender to take title to the home commences. This process can take anywhere from 3 to 6 months.
Yet another myth is that if a Reverse Mortgage lender does take title to a home left vacant by owners or unclaimed by heirs, it is considered a foreclosure, just as when a bank takes title to a home on a defaulted forward mortgage. – The reality is that the Reverse Mortgage lender does, in fact, have the right to take title to the property. This can occur only after the borrowers pass away or vacate the home and only after a detailed process has run its course for months. However, when a property, upon which a Reverse Mortgage is placed, has its title transferred to the Reverse Mortgage lender, it is just that, a title transfer. It has zero negative repercussions on the living or deceased borrower’s reputation or credit history.
There is also a myth or misconception that Reverse Mortgage lenders take all the borrower’s equity. The reality is that guidelines have been established to protect a borrower’s equity. For example, a 62 year old borrower will only receive approximately 47-52% of his/her equity. An 80 year old borrower will only receive approximately 59-63% of his/her equity. This leaves a substantial amount of home equity available, at the time of the loan closing, not to mention any additional value increases that may occur, via natural market fluctuations thereafter.