Reverse mortgages and HECMs – what you need to know

INTRODUCTION

It’s not uncommon for homeowners approaching or reaching retirement age to need additional income, whether to cover healthcare costs, supplement their Social Security, or renovate their homes. To allow for a more comfortable lifestyle as they age, people in these situations often apply for a reverse mortgage. Unlike a “regular” mortgage, where the borrower makes monthly payments to the lender, a reverse mortgage is the opposite: the lender pays the borrower an amount based on the borrower’s age, the equity in his or her home, and the required private mortgage is based on insurance premium and current interest rates. In general, more money is made available to the borrower the older he or she is, the more the home is worth, and the less owed on it. The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is funded and supported by the US Department of Housing and Urban Development (HUD). While private companies and some nonprofits also offer reverse mortgages, they restrict borrowers on how the money can be used. The funds provided under HECM can be used for any purpose.

OKAY, I AM INTERESTED IN APPLYING FOR A HECM BUT AM I ELIGIBLE?

To qualify for an HECM, you must be at least 62 years old, keep your home as your primary residence, and either own it outright or have made significant mortgage repayments. Because you retain title after qualification, you still need to get homeowners insurance and pay property taxes. As a prospective applicant, you will also need to meet with a HUD-approved HECM consultant to discuss eligibility requirements, determine if an HECM is the right product for your specific needs, and the various financial implications of the loan and its repayment. A counseling session costs around $125 (although you can’t be turned away if you can’t afford it) and to maximize effectiveness you should come with at least a basic understanding of the ins and outs of setting one up are, go to the meeting HECM.

WHAT IS ATTRACTIVE ABOUT A HECM?

HECMs are an attractive option because they typically provide larger amounts of credit at a lower cost compared to other categories of reverse mortgages. In addition, as mentioned above, they allow you to have complete control over how the money is spent. Another advantage is that HECM loans are not taxable, as is the fact that they do not have to be repaid until you sell your home, cease to use it as your primary residence, or in the event of death. Should you need to leave your home for medical reasons, the HECM program allows you to stay in a nursing home or other care facility for up to 12 consecutive months before the lender can request a refund. And if you are in a situation where the loan eventually matures and you end up getting more money than your home is worth, the only way the lender can recoup their advance is on the equity in your home; Your other assets and the assets of your estate are taboo.

WHY A HECM MAY NOT BE RIGHT FOR YOU

While they can be less expensive than other reverse mortgages, HECMs are still an expensive proposition due to the various upfront costs, which often run into thousands of dollars. In addition to being subject to the above mortgage insurance premium, you are also subject to lender origination and loan servicing fees, third party fees (e.g., title search, appraisal, surveys, etc.) paid in whole or in part). This is an important consideration, especially if you have no intention of staying in your home or if your financial needs are not extensive. You may also want to think twice about an HECM if you’re already struggling to keep up with your home’s maintenance requirements, insurance costs, and taxes, as it won’t be considered a breach of contract and will trigger an “acceleration clause.” which essentially states that the loan must be repaid immediately as a result of the breach. And while you and your heirs aren’t technically liable for any amount in excess of the home’s value, the balance of the reverse mortgage must be paid off in full or the lender has foreclosure powers.

KNOWLEDGE IS POWER – PROTECT YOURSELF

Taking out a reverse HECM mortgage is obviously not a decision taken lightly. To protect yourself from fraud or foreclosure, it’s important that you learn as much as you can about HECM’s features and costs, its pros and cons, before getting too far into the process. And when you’re ready to apply for a loan, take the time to have it thoroughly checked by a qualified professional.