Reverse Mortgage Facts
What is a Reverse Mortgage?
A Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan that enables you to access a portion of your home’s equity to obtain tax-free* funds without having to make monthly mortgage payments.
Benefits of a Reverse Mortgage
With a HECM loan:
- Your existing monthly mortgage payment is eliminated
- You stay in your home, continue to own the home and maintain the title
- Loan proceeds are tax-free and can be used as you choose *
- Your loan is insured by the Federal Housing Administration (FHA)
* Consult your financial advisor or appropriate government agencies for any effect on taxes or government benefits.
To be eligible for a HECM loan:
- The youngest borrower must be at least 62 years of age
- Non-Borrowing spouse under age 62 is allowed
- Your home must be your primary residence and have sufficient equity
- You must have the ability to pay off your existing mortgage using the HECM loan proceeds
- You must live in a single family, two-to-four unit1 owner-occupied home, townhouse, approved condominium or manufactured home
You must also:
- Complete a HUD approved counseling session
- Maintain your home according to FHA requirements
- Continue to pay property taxes and homeowners insurance
Types of Loans
There are two types of Home Equity Conversion Mortgage (HECM) loans. The HECM refinance loan is for seniors that already have a home they want to stay in. The HECM for Purchase Loan can give seniors a way to purchase a home utilizing a reverse mortgage.
HECM Refinance Loan The HECM is available as either an adjustable- or fixed-rate loan. With the adjustable rate, the rate is adjusted monthly based on the LIBOR (London Inter Bank Offered Rate). The fixed-rate HECM maintains the same interest rate over the life of the loan.
HECM for Purchase Loan The HECM for Purchase can help homeowners buy their next home without monthly mortgage payments. This loan enables borrowers to use the equity from the sale of a previous residence to buy their next primary home in one transaction.
HECM loans are “Non-Recourse” You or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home may be used to repay the debt.
Determining Your Proceeds
The funds available, also known as the Principal Limit, from a HECM loan depend upon:
- Age of the youngest borrower
- The lesser of the appraised value of your home, sale price, or the FHA national lending limit
- Current interest rates
- Balance of your existing mortgage, if applicable, and all mandatory obligations as defined by the HECM requirements.
The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements
How You Can Get Your Money
With an adjustable-rate HECM loan, you can select:
Tenure: Equal monthly payments as long as at least one borrower lives in, and continues to occupy, the property as a principal residence.
Term: Equal monthly payments for a fixed period of months selected by the borrower.
Line of Credit: Unscheduled payments or installments, at any time and in an amount of your choosing, until the line of credit is exhausted.
Modified Tenure: Combination of a line of credit, plus scheduled monthly payments, for as long as you remain in the home.
Modified Term: Combination of a line of credit, plus monthly payments, for a fixed period of months selected by the borrower.
Lump Sum: A single payment.
Borrowers may only access up to 60% of the principal limit amount for the first 12 months after loan closing.
What Can I Do with the Funds?
Your current mortgage if any must be paid off using the proceeds from your HECM loan.
You can also:
- Pay off debts
- Improve your monthly cash flow
- Fund necessary home repairs or renovations
- Help family members
- Build a “safety net” for unplanned expenses
You and Your Home is Protected
A HECM loan has built in safeguards that protect you and the home:
Federal Housing Administration (FHA) Insured HECM loans are FHA insured. You are always protected against lender insolvency and can expect to receive your proceeds.
Mandatory Mortgage Insurance HECM loans are required by U.S. Department of Housing and Urban Development (HUD) to charge mandatory mortgage insurance. This insurance protects borrowers and their heirs in the event the loan balance is higher than the home’s value at the time of sale.
Independent HUD approved counselors provide you with objective information and help you understand how HECM loans work.
Capped Interest Rates If your loan has an adjustable interest rate, there is a limit on how much some interest rates can change during a specific period of time.
Three Days to Cancel – After signing your loan closing paperwork, you have three business days to cancel the loan. This “Right of Rescission” applies to the HECM for Refinance Product, but does not apply to the HECM for Purchase loan.
What about Inheritance?
When the reverse mortgage loan does become due, the borrower’s heirs/estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan. If the home sells for more than the balance of the reverse mortgage loan, the remaining home equity passes to the heirs.
If the home sells for less than the owed balance, the estate is not required to pay more than the value of the home at the time the loan is repaid.