I have heard a lot about reverse mortgages lately and wanted to learn more. Following are ten pertinent things the US Department of Housing and Urban Development, specifically Secretary Shaun Donovan, points out:
1. What exactly is a reverse mortgage?
A reverse mortgage is a home loan that lets you convert a portion of the equity in your home into cash. However, unlike a traditional home equity loan or second mortgage, (Home Equity Conversion Mortgage) HECM borrowers do not have to repay the loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are buying.
2. Can you qualify for FHA’s HECM reverse mortgage?
To be eligible for an FHA HECM, you have to be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and it must be your primary residence. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by calling (800) 569-4287.
3. Can you apply for a HECM even if you did not buy your present home with FHA mortgage insurance?
Yes. You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage.
4. What types of homes are eligible?
To be eligible for the FHA HECM, the home must be a single family home or a 2-4 unit home with one unit occupied by you, the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must have adequate income to qualify for the loan, and they make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
6. Will you have an estate that you can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs. I was happy to read this part as this was my first question about these loans – i.e. what is left behind if someone dies?
7. How much money can you get from my home?
The amount you may borrow depends on:
You can borrow more with the HECM Standard option. In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow. You can refer to online reverse mortgage calculators for an estimate of the amount of funds you can borrow.
8. Should I use an estate planning service to find a reverse mortgage lender?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. You can locate a FHA-approved lender by searching online at www.hud.gov or by contacting a HECM counselor for a listing. Services rendered by HECM counselors are free or at a low cost. To locate a HECM counselor go online or call (800) 569-4287 for the name and location of a HUD-approved housing counseling agency near you.
9. How do I receive my payments?
You can select from five payment plans:
- Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence
- Term - equal monthly payments for a fixed period of months selected
- Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted
- Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home
- Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower
10. What if I change my mind and no longer want the loan after I go to closing? How do I do this?
By law, as with any mortgage loan, there is a three day right of rescission period. You have three calendar days to change your mind and cancel the loan. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place. In most cases, the right of rescission will not be applicable to HECM for purchase transactions.