What exactly IS a HECM Reverse Mortgage?
A HECM (Home Equity Conversion Mortgage) is a goverment insured reverse mortgage loan that enables homeowners who are 62 years of age or older to access the equity in their homes as tax free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Though there are other types of reverse mortgages, the answers here apply primarily to HECM loans. It is important that you seek professional advice before making any financial decisions.
How does a reverse mortgage work?
With a regular (forward) mortgage, money is borrowed to purchase the home and payments are made. The difference between what you borrowed and the market value of the property is your equity. As time goes on, the payments reduce the amount borrowed and hence, the equity enlarges. Appreciation in value of the property over time also contributes to your equity.
A reverse mortgage works in the opposite direction. You use the equity in your home to receive cash, either as a lump sum, a line of credit, monthly amounts, or a combination of all three. As time rolls on, the payments to you, along with interest on the loan balance, increase the loan amount and your equity in the home decreases
How do I qualify for a Reverse Mortgage?
You must be 62 years of age or older and have equity in your home.
How is my benefit amount calculated?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
What properties qualify for Reverse Mortgages?
Most property types are eligible for reverse mortgages. These would include Single Family Homes, qualified condominiums, townhouses, manufactured homes and 1 to 4 family owner occupied residences are eligible.
How do I get my money?
You have three options on how to receive your funds.
- Monthly Payments (made to you)
- Lump Sum Cash to you
- Line of Credit – unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted.
What are the Benefits of a Reverse Mortgage?
- There is never a monthly payment obligation, though you are free to pay down your balance if you choose.
- You cannot be forced out of your home, regardless of the balance of your mortgage, so long as you maintain your obligations (covered below) under the mortgage.
- Funds from a reverse mortgage are tax free and do not effect your eligibility for regular social security and Medicare. *You should always consult a tax expert to verify tax benefits.
- Reverse mortgages allow you to access the equity in your home while allowing you to stay in the home.
- Reverse Mortgages are “non-recourse” loans, meaning when the loan comes due the lender cannot recover more than the value of the home. Thus, your estate will not be responible for additional funds if the mortgage is upside-down.
What are the obligations of maintaining a Reverse Mortgage
You continue to be responsible for payment of property taxes, hazard insurance and the proper upkeep of the home. A breach of these obligations can render the outstanding loan due and payable.
Similarly, any absence from the home of the last surviving borrower for more than twelve consecutive months terminates the agreement. Selling or renting out all or part of the home or placing additional liens on the home can also also trigger payment.
What happens when I die?
The reverse mortgage comes due and payable if the borrower (or both borrowers when there is a spouse) pass away. Your heirs have two options. First, they can payoff, or refinance the balance and keep the home. Second, they can sell the home and receive any proceeds above the reverse mortgage balance. It is important to remember that if the home is sold, the lender cannot recover more than the what the home is worth, so your heirs will not have to pay additional funds if the mortgage is greater than the value of the home.