HECM, Home Equity Conversion Mortgage

What is a Reverse Mortgage? 

Reverse mortgage is a type of home loan that allows senior homeowners to convert the equity into cash. The equity built up over years of mortgage payments can be paid to the homeowner: in a lump sum, in a stream of payments, or as a supplement to Social Security or other retirement funds.

How does a Reverse Mortgage work? 

With a reverse mortgage, you receive money from your mortgage company as a loan secured against the equity in your home. The money is paid to you in a lump sum, through a line of credit, or as monthly payments. Fees and interest are charged on the loan amount (or “loan proceeds”); therefore, over time the loan balance increases and your home equity decreases.

Overview

As home prices have increased, many older owners may be tempted to use some of the equity sitting in their homes to sustain their desired lifestyle.

A reverse mortgage can help retirees convert an illiquid asset, (home), into a liquid one that can help supplement retirement income while allowing them to remain in the home.

The Reverse Mortgage program was created to fulfill the promise consumers hear in the TV commercials: “A reverse mortgage is a safe government insured loan that allows the borrower to access part of the equity in their home, remain in their home for life without making a house payment, provide financial security, provide additional income, a better quality of life in retirement and meet the borrowers wishes for their estate.”   

Reverse mortgages are actual home equity conversion mortgages offered through the HUD, Department of Housing and Urban Development and guaranteed by FHA, Federal Housing Administration.

Requirements

  • 62+ year old
  • Own home (or) have a balance that can be paid off with proceeds from the reverse loan.
  • You must live in the home.
  • Must be able to pay your utilities, taxes, insurance, and HOA if applicable
  • You cannot take out another HELOC on the same home.

Amount available for credit is determined by:

  • The equity you have in the home.
  • The age of the youngest person on the mortgage.
  • Interest rate.

Summary:

  • The more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow.
  • When home is sold or no longer used as a primary residence, the cash, interest and other home equity conversion finance charges must be repaid.
  • All proceeds beyond the amount owed belong to your spouse or estate.
  • Any remaining equity can be transferred to heirs.
  • No debt is passed along to heirs.
  • Note:  You are using equity from your home that may need to be used after selling to fund assisted living.

 

WHAT YOU NEED TO KNOW:

  • HECM Reverse Mortgages have a maximum claim amount of $625,000.  This does not mean you will get $625,000.
  • PROPRIETARY Reverse Mortgages generally have a maximum claim amount of 40% of the property value and are often used when the property value is $700,000 or more.  
  • If you get a HECM loan you will not have monthly mortgage payments.  All pre-existing liens on your property must be paid by the reverse mortgage funds.  
  • Originating costs can be up to $25,000.  
  • Payoff of existing liens, origination costs, and any reverse mortgage proceeds taken at origination will be the initial loan balance on day 1. Reverse Mortgages have compounding interest on the loan balance.  The maximum claim amount on a HECM reverse mortgage is $625,000. An Algorithm based on the age of the youngest borrower, property value and interest rate determine how much of your home equity you will be able to access.  
  • You can take the funds in a variety of ways:
    • A lump sum payment, a line of credit, or a monthly income or a combination of these options.  

There is only ONE REASON to get a reverse mortgage:  For use as part of your financial strategy, to meet your health and personal needs (long term), to meet your financial goals (long term), provide financial security through your retirement, and meet your wishes for your estate.  If a reverse mortgage does not meet this purpose do not get it.

 

REASONS NOT TO GET A REVERSE MORTGAGE

  • A short term solution to a financial problem.
  • Never remove a spouse from title
  • Do not get a reverse mortgage at 62
  • If you are in your 80's or 90's do not get a fixed rate reverse mortgage

Explore all your homeowner options before making a decision:

  • Lease you Home
  • Sell your Home
  • Refinance your current mortgage
  • Get a Line of Credit
  • Family Loan/Peer to Peer Loan
  • Rent a portion of your Home
  • Reverse Mortgage

Once you explore all your options choose the one that makes the best financial sense for your situation. Be open to making the best decision for your financial wellbeing.

 

DIFFERENCE BETWEEN A REVERSE MORTGAGE AND A TRADITIONAL MORTGAGE

There are fundamental differences between a traditional forward mortgage and a reverse mortgage, a few are:

  • Reverse Mortgages are sold to those 62 and older
  • The contract, terms and consequences have a Lifelong Impact
  • You lose most of your traditional Homeowner's Rights.
  • Interest is compounding on the fees, costs, loan, and mortgage insurance. It eats up the remaining equity much faster than regular interest.
  • There are no consumer protections, no agencies to get help from, no enforcement or oversight of the very few regulations designed to protect the consumer interest, and no recourse once signed.  It's almost impossible to get out of a reverse mortgage without a huge financial loss.
  • There can be no other liens on your property so what you get from the reverse mortgage is all the equity you will be able to access over the term of the loan.

WHAT YOU NEED TO DO:  Steps to Determine Your Suitability

  • Simply put SUITABILITY means "is a reverse mortgage right and beneficial for me and my circumstances?" The smartest consumers will include trusted advisors (family, financial advisor, attorney, tax consultant, etc.) in making the decision. That way your decision will be based on the facts, consequences, costs, and benefits for your circumstances.
  • Create a financial plan 5, 10, 15, and 20 years out based on your current age, financial goals and needs, personal & health circumstances, and wishes for your estate.  
  • I recommend a TRUST and putting the property in the Trust.  A Trustee or Successor Trustee has automatic legal authority to represent your interest while you are living and represent your estate when you die.  A Power of Attorney will work if signed while you have capacity and through your life but is invalid upon your death.  Even if your property is your only asset it can be more cost effective to have a Trust rather than go through probate to meet your wishes for your property.
  • If you have a will or die intestate the Servicer will not work with your executor or representative without probate or a court order.  This could cost thousands and thousands of dollars and take a long time to complete.  The Servicer will accelerate foreclosure.  
  • Disclaimer:  I am not an attorney and not giving legal advice.  The suggestion of a Trust is based on thousands of consumers who have been obstructed from satisfying the reverse mortgage and lost the home to foreclosure.

NOTE:  

  • Get everything in writing from the Lender.  Get a copy of all signed and executed documents at origination closing.  Verbal promises, even well intentioned ones are made all the time and are not enforceable by law.  Verbal promises may violate State or Federal law and you will have no recourse on a verbal statement.
  • There is a reason all this sounds so complicated and that's because the Government (HUD) defines a Reverse Mortgage as a “COMPLEX FINANCIAL TRANSACTION” in the “Important Notice” (a required disclosure).  
  • As with any complex financial instrument you would get competent, professional, independent legal/financial and/or tax advice to understand the binding legal documents, the important financial and legal implications, the terms and their (lifelong) consequences that impact you and your estate.  With help you can make a conscious and informed decision on the suitability of a reverse mortgage to meet your needs, goals and provide financial security. 

 

Guidelines change frequently, therefore, we do not guarantee accuracy.  Above is provided as a reference, to be confirmed with our team. Subject to change without notice.