What is a Reverse Home Equity Conversion Mortgage?
A Home Equity conversion Mortgage (HECM), also known as a Reverse Mortgage, is government insured loan program offered by the Federal Housing Administration (FHA).
Maybe you’ve seen commercials on TV about Reverse Mortgages.
Mortgage companies offering this Government insured mortgage solution are famous for using Celebrity spokespeople to build awareness for this underutilized home mortgage loan program.
A Reverse Mortgage allows eligible borrowers, 62 years of age or older, to access a portion of your home’s equity, and take tax-free funds without having to make monthly mortgage payments.
In some cases, your mortgage can pay you monthly, in a lump sum, or a combination of the two, which we will go into in more detail later.
Quality of Life
The way a Reverse Mortgage is structured makes it confusing to many borrowers, mostly because it does not follow the more familiar loan structure where monthly loan payments are required over a specific period of time.
After all, how do you take out a mortgage and not have to make a mortgage payment for the rest of your life? There are many myths and misconceptions about this mortgage program, most of them due simply to a lack of education.
The fact is, Reverse Mortgages are a government program designed to assist seniors through retirement by allowing them to use the equity in their home to provide a higher quality of life.
For the adult children of aging parents, it is our responsibility to understand this option, as it can greatly help our parents live more comfortably, with more money to do the things they want to do in retirement.
Reverse Mortgage Payment Options
“Historically, people have sought HECM loans as a way to make ends meet, as they balance the costs of health care, housing and other basic needs in their retirement years. But in today’s housing market, it has become more common to see people using them to eliminate their monthly mortgage payments” – Wall Street Journal, June 27th, 2010
One common myth is that the home must be free and clear of any existing mortgages in order to use a Reverse Mortgage. While options are limited to the equity in the home, this simply is not true.
Actually, many home owners pay off an existing mortgage, and either take cash out, receive monthly payments for life, or simply eliminate mortgage payments for life.
With a fixed rate Reverse Mortgage, you can eliminate your payments for as long as you live in the home, maintain the home to FHA habitability standards, stay current on your homeowner’s insurance and property taxes.
When using an adjustable-rate Reverse Mortgage, you have many additional options.
Receive equal monthly payments as long as at least one borrower lives in, and continues to occupy the home as your principal residence.
Receive equal monthly payments for a fixed period of months that you choose. The amount of equity, and the number of months you choose to be paid will determine the amount of each payment.
Line of Credit
You can also use a Reverse Mortgage as a Home Equity Line of Credit (HELOC), taking unscheduled payments or installments, at any time, in any amount you choose, until the line os credit is exhausted.
Maybe you want a hybrid, or combination of one or more of these options? A modified tenure option allows a combination of a line of credit, plus scheduled monthly payments, for a s long as you remain in the home.
Similar to a modified tenure, a modified term allows you to structure a combination of a line of credit, plus monthly payments, for a fixed period of months determined by you.
You can receive a single payment up to the maximum allowed, with no payments for as long as you live in the home.
Reverse Mortgage Protections
Home Equity Conversion Mortgages have built in safeguards that protect you and your home.
- Federal Housing Administration (FHA) Insured – Reverse mortgages are FHA insured. You are always protected against challenges the lender may have, and will always be able to receive your payments, or continue to make no payments, even if the lender goes out of business.
- Mandatory Mortgage Insurance – Reverse mortgage are required by the U.S. Department of Housing and Urban Development (HUD) to charge a mandatory mortgage insurance. This mortgage insurance protects you and your heirs in the event the loan balance is higher than the home’s value at the time of sale.
- Independent Counseling – Before you commit to a Reverse Mortgage, an independent HUD approved counselor will provide you with objective information, and help you understand how the HECM loan works.
- Capped Interest Rates – If your loan has an adjustable interest rate, there is no risk of it skyrocketing out of control. There is a limit on how much some interest rates can change during a specific period of time, and over the lifetime of the loan. All of this will be disclosed upfront, and reviewed by the HUD approved counselor.
- Three Days to Cancel – After signing your loan documents, you have three business days to cancel your loan. This is called a Right of Rescission, and applies to all HECM refinance mortgages. There is no right of rescission for purchase money Reverse Mortgages.
Ask an Expert
If you have questions about using a reverse home equity conversion mortgage before contacting a sales person, we have experts standing by that can help.
Simply ask a question or leave a comment below and I promise to get you pointed in the right direction to get your questions answered.