A reverse mortgage, otherwise known as a Home Equity Conversion Mortgage, (HECM) is a loan, using your home as collateral, and where payments on the loan are not required monthly or at all. Instead the loan becomes due and payable only after the last homeowner either dies, sells the home or stops living in the home for 12 consecutive months. With a reverse mortgage, unlike a conventional mortgage, where you make payments regularly and the balance on your loan slowly goes down each month and the equity in your home increases; with a reverse mortgage, you do not make regular payments so the balance on your loan actually increases every month and the equity in your home decreases. Most of these loans are backed by FHA Mortgage Insurance and are designated as non-recourse loans. This means that at no time will the homeowners or their heirs ever owe more than what the house ultimately sells for when the loan becomes due.
The requirements for this mortgage are simply that all persons who will be listed as homeowners on the mortgage are at least 62 years of age. Also no other loans can be listed ahead of this loan so generally any other mortgages would need to be paid off from the proceeds of this loan. This means, in order for you to get a reverse mortgage, there must be more than enough equity to pay off any existing mortgages on the home.
The amount available to borrow is dependent on the fair market value of the home as well as the age of the youngest borrower. The older the borrower, the larger the percentage of the home value is available to be borrowed. The formula for determining this is maintained by the FHA. You can never borrow the full amount of the equity because of the non-recourse nature of these loans so as a result not all seniors will actually have enough equity get a reverse mortgage.
The loans can either be taken as fixed rate or adjustable rate loans. When the borrower elects to take an adjustable rate loan they will have a choice to take the loan out as one lump sum payment, or to take regular monthly payments. Further, the borrower can take a combination of lump sum and monthly payments, and still leave some of the funds in a credit line, available to take whenever needed. All these choices have advantages and disadvantages that need further explanation.
These loans can be very expensive with fees and other costs, especially if the homeowner does not intend to stay in the home for very long. It is due to the complexity of the loan and the costs, that the Department of Housing and Urban Development has mandated that anyone interested in obtaining a reverse mortgage must go through a counseling session with a HUD Certified HECM Counselor before applying for a loan. The purpose of the counseling is to insure the borrower understands how the loan works, what the implications to the equity in the home are, how it will affect your heirs, tax implications, what other alternatives may be available to the borrower to help with their financial situation and what to look for when evaluating different lenders’ loan products. A list of HUD Approved Counselors is available on the HUD website but if you are interested you may call Take Charge America at 1-866-750-9618 to be connected to a HUD Approved HECM Counselor.