There are few terms in the finance industry more reviled in the minds of the general public than reverse mortgage. However, as is often the case in the world of finance, long-held perceptions and biases are not always reflective of the financial reality of today’s economy and, as a result, can be counter-productive. Regardless of what you think you know about reverse mortgages, and barring some new revolutionary change in the world of retirement income sources, these products will likely be an absolute must for many Americans in the coming years. Therefore, it is a mistake to shun this option without doing some research. By gaining a deeper knowledge about how they work, pre-retirees and retirees can determine if a reverse mortgage might have some value for them going forward, which is why it is more important than ever to have a financial advisor that understands retirement planning to ensure that your income will last a lifetime.
An essential element of your retirement plan may be a Home Equity Conversion Mortgage (HECM), better known as a Reverse Mortgage. A Reverse Mortgage is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, and make home improvements and more.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM 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 purchasing.
2. Can I qualify for FHA's HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you 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, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. 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 at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or by phoning (800) 569 4287.
3. Can I apply for a HECM even if I did not buy my present house 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, your home must be a single family home or a 2-4 unit home with one unit occupied by 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 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 we have an estate that we 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.
7. How much money can I get from my home?
The amount varies by borrower and depends on:
* Age of the youngest borrower or eligible non-borrowing spouse
* Current interest rate; and
* Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price. If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
8. How can I find 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 Search online at https://www.hud.gov/program_offices/housing/sfh/hecm/hecmlist or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
9. How do I receive my payments?
For adjustable interest rate mortgages, you can select one of the following 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.
For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.
* Single Disbursement Lump Sum - a single lump sum disbursement at mortgage closing.
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, you have three calendar days to change your mind and cancel the loan. This is called a three day right of rescission. 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.
For more information on reverse mortgages, your retirement income needs, and income sources, please contact us today at 720.981.3524. We have helped numerous clients with their reverse mortgages and can help you decide if a reverse mortgage is right for you!
You can receive additional free information about reverse mortgages by contacting the National Council on Aging at (800) 510-0301.