Reverse Mortgage and HECM

  • By Admin
  • May 28, 2014
  • Comments Off on Reverse Mortgage and HECM

old parents adult daughterA reverse mortgage is a type of home loan that lets you turn a part of the equity in your home into cash. The most popular reverse mortgage program is the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM). HECM mortgages are regulated by the Department of Housing and Urban Development, or HUD. The HECM is designed to help senior citizens in retirement pay for living expenses. Since we work most of our lives paying into the equity of the home, only to leave a chunk of assets after we die, why not use some of those assets we have built in the home to help pay some bills while we are alive?

A reverse mortgage differs from a regular mortgage we are used to seeing in that while the latter requires you making monthly payments, the former pays you, hence the “reverse” part. With a reverse mortgage, the homeowner/borrower is still required to pay real estate taxes, insurance, and other expenses.

When the subject home is no long used as a primary residence, i.e., in the case of the passing of the homeowner, the HECM and fees must be repaid. Any remaining proceeds after paying off the HECM go to the surviving spouse or the estate.

FHA’s reverse mortgage program has certain underwriting criteria. In order to be eligible for the HECM, the applicant has to;

1. be 62 years of age or older;
2. own the home outright, or at the very least have a low balance on the current mortgage;
3. demonstrate the financial ability to meet homeownership obligations, such as insurance and property tax, and;
4. live in the subject house.

The maximum that a home owner can borrow depends on the following factors:

1. The age of the homeowner (of the youngest if a couple owns the home);
2. The current interest rate environment;
3. The lesser of the appraised value of the house, or the HECM limit set by FHA, or the sales price, and;
4. The initial mortgage insurance premium.

FHA allows the following type of properties to be used as collateral for HECM:

1. Single family homes;
2. 2, 3, and 4 family homes with the owner/applicant living in one of the units;
3. Condominium units located in HUD-approved projects, and;
4. HUD-approved co-operative projects.
Equity is paid to the home owner in one of the following 4 payment plans;

1. Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence;
2. Term – monthly payments for a fixed period of months.
3. Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted;
4. Modified Tenure – combination of line of credit and scheduled monthly payments for as long as you remain in the home;
5. Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower;
6. Single Disbursement Lump Sum – a single lump sum disbursement at loan settlement.

HECM is not the retirement panacea as the TV ads make them out to be. Between the loan origination fee, mortgage insurance, banks built-in margin on the interest, the HECM is a very costly loan. Interested homeowners should head over to the HUD website and read up on the subject.

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