by Patricia LaCroix, contributing writer
If you watch TV at all during the day, you’ve probably seen commercials for a loan known as a “reverse mortgage.” These loans are often directed and advertised specifically to older adults.
When a senior takes out a reverse mortgage, a portion of his or her home’s equity is borrowed as a loan. This population tends to have a lot of financial equity in their homes. They might even have their homes fully paid off. But, they also might be finding themselves having trouble to make ends meet financially. Their income, often fixed, might not be enough even for the basics. Or, while it might be covering the basics, the senior might be more accustomed to or desire a more financially comfortable lifestyle.
There is only one reverse mortgage that is insured by the U.S. Federal Government. That loan is known as a “Home Equity Conversion Mortgage” or HECM for short. It is only available through a lender approved by the Federal Housing Administration (FHA).
The Home Equity Conversion Mortgage
If an older adult would like to apply for the government-backed HECM loan, the amount that the senior can withdraw varies and depends on:
The age of the youngest borrower or eligible non-borrowing spouse;
The current interest rate when the loan is taken;
The lesser of the appraised value, the HECM FHA mortgage limit, or the sales price.
If there is more than one borrower and there is no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount that can be borrowed.
A HECM can be used to purchase a primary residence as well, if there is cash on hand that can be used to pay the difference between the HECM proceeds and the sales price, plus closing costs, for the property being purchased.
How to decide if a HECM reverse mortgage makes sense
To truly decide if a HECM is the right move, the best thing to do is meet with a HECM counselor to discuss program eligibility requirements, financial implications, and alternative to obtaining a HECM loan and ways to repay it. To find a HECM counselor,
Requirements for the HECM program
There are three major categories of requirements that must be met: borrower requirements. property requirements, and financial requirements. To review a list of those specific requirements, click HERE. The counselor will help the borrower review all the requirements to see if they can be met.
Costs for the HECM program
A senior who successfully applies for the HECM loan can pay for most of the costs of by financing them and having them paid from the proceeds of the loan. Financing the costs means that they don’t have to be paid for out of pocket. On the other hand, financing the costs reduces the net loan amount available to the borrower.
The HECM loan includes several fees and charges, which includes: 1) mortgage insurance premiums (initial and annual), 2) third party charges, 3) origination fee, 4) interest, and 5) servicing fees. The lender will discuss which fees and charges are mandatory.
You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be 2%. Over the life of the loan, you will be charged an annual MIP that equals 0.5% of the outstanding mortgage balance.
To learn more about the costs associated with HECM loans, click HERE.
Counselors and lenders
Those considering applying for a reverse mortgage can reach out to a HECM Counselor for more information or help. Click HERE to search the HECM Counselor Roster, or call 800-569-4287 to find a counselor who can help.
Information courtesy of the U.S. Department of Housing and Urban Development.