How do They Work?
A reverse mortgage provides the homeowner with payments using the home as collateral and by borrowing against the value of the home. Your existing remaining mortgage balance will become due when you permanently move away, sell the home, or pass away. The most common type of reverse mortgage is called Home Equity Conversion Mortgage (HECM) and is federally subsidized by the U.S. Department of Housing and Urban Development (HUD).
Why Get a Reverse Mortgage?
According to NRMLA, homeowners 62 and older in the U.S. held $6.82 trillion in home equity at the end of Q1 2018.* There is a lot of untapped home equity for retirement-age adults in the United States. To access this home equity, owners can either sell their home or borrower against it.
A cash-out refinance can be a good solution, but the monthly payments may become a burden to pay back during retirement. Rather than refinancing or selling your home and incurring all the hassles of moving, borrowers over the age of 62 with significant equity in their homes can apply for a reverse mortgage.
Benefits of a Reverse Mortgage:
- Consolidate debt
- Potentially gain more financial flexibility and control
- Pay for large purchases, like a new automobile
- Fund major home renovation projects
- Establish a standby line of credit you can access as needed
- Buy a home with the available funds
Frequently Asked Questions
What is a HECM?
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a home-secured loan that can turn part of the equity you’ve built up in your house into funds you can use today, or a line of credit that will be there when you need it. It is insured by the Federal Housing Administration (FHA) and offers all of the benefits of a traditional line of credit that you can get from a bank but with additional benefits including a flexible repayment feature. As with any mortgage, you must meet your loan obligations, keeping current with property taxes, insurance, maintenance and any homeowners association (HOA) fees.
What are the basic requirements?
You may be eligible for a HECM if you are at least 62 years old, own and have sufficient equity in your home, and live in the home as your primary residence.
What if I still owe money on a first or second mortgage?
You may still be eligible. Proceeds from your HECM would first be used to pay off any existing mortgage(s). This means the balance of your existing mortgage(s) will be added to the balance of your HECM.
How much money can I get?
The specific amount depends on several factors, including your age, type of HECM you select, the value of your home, prevailing interest rates and Federal Housing Administration (FHA) lending limits.
How is a HECM different from other home-equity based loan options?
A HECM offers certain advantages that provide greater flexibility and financial control:
- With a HECM line of credit, the unused amount in your credit line actually grows over time giving you access to more available funds.
- It has a flexible repayment feature: You decide how much or how little to pay each month toward principal and interest. Or you can choose to make no monthly loan payment at all. As with any home-secured loan, you must meet your loan obligations, keeping current with property taxes, insurance, maintenance, and any homeowners association fees.
- A HECM can’t be canceled or reduced, as long as you meet your loan obligations and live in the home as your primary residence, so it will be there when you need it.
- With an FHA-insured HECM, you’re not responsible to pay the difference if the loan balance ever exceeds the value of your home when the loan becomes due. This is known as the non-recourse feature.
How can I receive the funds from a HECM?
You can take your funds as a lump sum, line of credit, monthly advances, or any combination of these.
Will a HECM affect my government benefits?
The funds from a HECM generally do not affect regular Social Security or Medicare benefits. However, needs-based benefits, such as Medicaid and Supplemental Security Income (SSI), may be impacted. We can provide additional general information, but you should contact a financial professional or government benefits specialist about your particular situation. Visit www.ssa.gov.
How can I use the proceeds?
You can use the proceeds however you choose. For example, you may use the proceeds to refinance your home, consolidate debt, fund large home renovations or simply serve as a reserve line of credit. You can even use a HECM to purchase a new home that better fits your needs and wants; ask us about our HECM for Purchase option.
Will I have to pay any fees?
With the exception of a fee for government-required HECM counseling, most of the fees associated with a HECM can be financed with your loan, so there’s no immediate out-of-pocket expense. The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due. These fees may include an origination fee, closing costs, a mortgage insurance premium (required for HECM loans) and a monthly servicing fee. Your HECM loan specialist can provide a detailed breakdown.
What happens at the end of the mortgage?
At the end of a reverse mortgage, you will repay the loan balance, any added fees, and the accrued interest. Homeowners (or their heirs) usually choose to do this by selling the home. Repaying the loan with other assets or by refinancing through a conventional mortgage is also an option if you or your heirs want to keep the home.
Can I refinance a this type of mortgage?
Yes. If you refinance a reverse mortgage, you are replacing your existing reverse mortgage with a new one. The new reverse mortgage will typically have a different interest rate and mortgage terms than the original mortgage.
What if one of the co-borrowers passes away or must move out for health reasons?
The other borrower continues to own and live in the home and enjoy all of the benefits of their HECM. As with any home-secured loan (or mortgage), you must meet your loan obligations, keep current with property taxes, insurance, maintenance, and any homeowners association fees.
*NRMLA (National Reverse Mortgage Lenders Association) https://www.nrmlaonline.org