HUD Regulated Home Equity Conversion Mortgage
It is simply a Financial Tool, for homeowner(s) 62 years or older, that allows you to use some of the equity in your home without selling, without moving out, and without mortgage payments. Since so many homeowners have their savings in the equity in their homes, this financial tool helps them. It allows you to “convert” some of your real estate equity to cash so you can use it any time and in any way that you want.
The money you receive from a reverse mortgage is not taxable as income and does not affect Medicare or Social Security payments. You may take your money all up front when the loan is made, in consistent monthly payments for the rest of your life, leave it in a Line of Credit where you haven’t borrowed it, but have access to it anytime you want, or a combination of these.
Strictly Regulated to Protect the Borrowers
Safeguards for Seniors
This type of Reverse Mortgage loan, commonly called Home Equity Conversion Mortgage (HECM), was designed by the US Department of Housing and Urban Development (HUD) to help seniors retire and stay in their home. They are strictly regulated by HUD through laws establishing fee limits, safeguards, and independent counseling requirements. And reverse mortgages are insured by the FHA so you are assured of getting all the money you are entitled to even if the bank that holds the loan becomes insolvent. The amount over the loan, the increase in equity value of your home, must go to you or your heirs.
New for 2014 are regulations about the rights of a spouse who is younger than 62. Now they are protected so they will be able to remain in the home as long as they want after the death of the older age-qualifying spouse. Click here for details.
New for 2015 are some financial and credit qualifications. Starting March 2, 2015, the FHA insured Home Equity Conversion Mortgage underwriting will require the applicant to meet some minimal financial and cred benchmarks. These are not made to prevent homeowners from receiving a HELOC reverse mortgage, but rather determine the way to structure the loan to insure that the homeowner can stay in their home for the remainder of their life. This will help prevent foreclosures and seniors losing their home. Complete the contact form and I will go over the information needed with you.
The most important feature of this loan is that you are not required to make any loan payments during the life of the loan.
Why is it called a Reverse Mortgage?
It is called reverse mortgage because the payment stream, or cash flow, is “reversed” during the life of the loan. Instead you of making payments to the bank as with a regular mortgage, with a reverse mortgage the bank pays you. The flow of money is in reverse. The bank is paid only at the end of the loan.
Of course you must pay the taxes, insurance, HOA fees if any, and maintain the home as you would with any other mortgage.
The title to your home stays in your name. The bank does not own your home.
The amount of tax-free money you receive depends on your age and the value of your house. At the bottom is a link for my calculator. It will give you an estimate of what you may receive. The amount you receive also depends on the structure of the reverse mortgage you chose. (see below – choices and decisions)
How does the money come to you?
You may take your money:
- 60% of the amount you qualify for up-front at loan closing, with the remainder available to you after one year.
- In equal payments for your lifetime or as long as you live in the home, whichever is sooner
- In payments for a specified term of years, such as 10 years, 20 years, etc.
- If you have a traditional mortgage to pay off, you may take up to 100% of the amount you qualify for to payoff the mortgage.
- You may leave any or all of the amount you qualify for in a Line of Credit. This is money that is available to you, but you have not borrowed it yet so no interest accrues.
The Line of Credit feature is the most useful financial tool
Amounts that you allow to remain in the Line of Credit grow compounded monthly at 1.25% more than whatever the current interest rate is on the mortgage. That means that by establishing a Line of Credit with a reverse mortgage and letting it grow, you will have access to greater and greater amounts of cash in the future. There are financial strategies that use this Line of Credit as part of a retirement plan. For more information see Optimizing your Income or Protecting Your Home Equity or Insurance Against Market Downturns or An Investment Strategy or A Unique Combination of Investment Strategies.
When the Loan Comes Due
The loan comes due when you no longer live in the home – when the last remaining homeowner dies, moves out permanently, or sells. To keep the loan safely in place you also must maintain the home, keep property taxes paid, and continue the homeowner’s insurance, just as you would with any mortgage loan.
The Heirs Have Choices
When the home value is more than the loan balance:
Normally there is equity in the home when the borrower dies. When the home passes to your heirs, they will have up to one year, with HUD approval, to satisfy the loan. This is to make sure they are not forced to make a quick sale and lose some of the equity. Some children or other heirs choose sell the property and keep the cash from the sale, and others choose to pay off the reverse mortgage from savings or by refinancing and live in the home. It is completely up to them how to handle their inheritance.
When the home value is less than the loan balance:
First, your heirs will never be responsible for any shortfall should the home value drop below the loan amount. The loan has a “non-recourse” clause that means the house alone stands for the debt.
Second, if they wish to keep the property, HUD has made rules that allow the heirs to keep the property at less than the market value. The heirs may satisfy the HECM debt (payoff the reverse mortgage) by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
Homes that Qualify
Homes that are eligible for a reverse mortgage include single-family homes, detached homes, townhouses, and two-to-four unit properties that are owner-occupied. Condominiums must be FHA-approved. Some manufactured homes are eligible but must meet FHA guidelines.
The home does not have to be owned free and clear. A reverse mortgage is often used to pay off and existing mortgage so there will be no payments each month.
You may use this link to go to my calculator. Calculator
The amount you receive does depend on your age and the value of your house, but it also depends on the reverse mortgage program and structure you chose for receiving your money. These are decisions that should be made after consultation so that all the factors may be considered.
Many choices to be made.
With a little research, you will find that there are lots of choices to be made in reverse mortgage programs –HECM Regular, HECM Choice , fixed rate, adjustable, lines of credit, lump sum, mortgage insurance, tenure, lender credits, etc. And there are new products in the development stage that may come to market at any time that could be of advantage to you. It is important that you get the right one for your individual circumstances. Decisions about the exact reverse mortgage program that suits your situation should be made after our consultation. Together, we review your financial condition, your goals for the future, and the life style you want. Then you can better make a decision on the best reverse mortgage program – one that protects you and your home.
The wrong reverse mortgage program could use up your equity too fast. Don’t let that happen to you. It can be a safe and useful financial tool when used correctly.
There is NO charge or obligation to having a private, confidential consolidation with me.
You may find that a reverse mortgage is not right for you. If that is the case, it is not a loss for me. We will have met, and it is my hope that you will feel comfortable recommending me to your friends if they have questions about reverse mortgages.