A Home Equity Conversion Mortgage (HECM) is a loan that allows homeowners who are age 62 or older to convert their home's equity into available cash. It works much like a traditional mortgage, only in reverse. Reverse mortgages are "rising debt, falling-equity" loans, because as debt increases, home equity falls.
Unlike a conventional home equity loan, a reverse mortgage does not require any repayment of principal, interest or servicing fees as long as you live in your home. You may use the cash you obtain from a reverse mortgage for any purpose. With most home loans, if you fail to make your monthly repayments, you could lose your home. But with a reverse mortgage, you do not have any monthly repayments to make. So you cannot lose your home by failing to make them. However, it is very important to keep in mind that taxes and insurance do remain your responsibility.
There are no income or credit requirements for a reverse mortgage. In order to qualify for a reverse mortgage, all owners and co-owners of the home must be age 62 or older and at least one homeowner must reside in the home as their primary residence at least six months out of the year.
If you have any debt against your home, you must either pay it off before getting a reverse mortgage or use an immediate cash advance from the reverse mortgage to pay it off. If you do not pay off the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.
You must own your home and all owners must be at least 62 years old.
Generally, your home must be your "principal residence". This means you must live in it more than half the year. For a federally insured HECM, your home must be a single-family property, a two- to four-unit building, or a federally approved condominium or Planned-Unit Development (PUD). For Fannie Mae's "HomeKeeper" mortgage, it must be a single family home, PUD or condominium.
Reverse mortgage programs do not lend on cooperative apartments or mobile homes, although some "manufactured" homes may qualify if they are built on a permanent foundation, classed and taxed as real estate and meet other requirements.
Again, if you have any debt against your home, you must either pay it off before getting a reverse mortgage or use an immediate cash advance from the reverse mortgage to pay it off. If you do not pay off the debt beforehand, or do not qualify for a large enough immediate cash advance to do so, you cannot get a reverse mortgage.
The amount of cash available to you depends on the age(s) of the owner(s), the value (and in some cases the location) of the home, current interest rates and the specific reverse mortgage program you choose.
In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.
Currently, there are several options from which you may choose to have your cash distributed.
You may accept an immediate cash advance at closing; that is, a lump sum of cash paid to you on the first day of the loan. You may also choose a credit line account that lets you take cash advances whenever you choose during the life of the loan — until you use it all up.
However, you can choose to take a monthly cash advance for a specific number of years that you select or for as long as you live in the house. You can also choose any combination of immediate cash advance, credit line account and monthly cash advance. Reverse mortgage loan advances are not taxable and generally do not affect Social Security or Medicare benefits. However, you must be careful that any loan proceeds you retain do not exceed the monthly liquid resource limits for Supplemental Security Income (SSI) and Medicaid.
You have the option of changing your payment plan type at any time for a fee not to exceed $20.00. You should ask your lender about the procedures for changing your payment plan in the future.
A Home Equity Conversion Mortgage (HECM, or reverse mortgage) must be a first mortgage. If you have an existing mortgage, it must be paid off before closing or paid off at closing with funds you receive from the HECM. Any additional lien against your property must be either be paid off or subordinate to the HECM.
HECMs typically involve four types of costs: an origination fee, closing and other third-party costs, servicing fees and the mortgage insurance premium. With the exception of the mortgage insurance premium, many of these fees can vary from lender to lender. Your lender must provide you with a Total Annual Loan Cost (TALC) disclosure prior to your loan closing.
Interest is charged on all money that you receive and on all loan costs that have been financed. You may select an interest rate that is fixed or that adjusts monthly or annually, although all lenders do not offer all options. Your lender must provide you with the index, the margin and the periodic and lifetime caps for adjustable interest rates.
After closing a HECM, you, as the borrower, have 3 days to cancel the mortgage if you choose. This is also known as the "rescission period", an important measure implemented to protect the consumer.
When the loan becomes due and payable, you or your estate must pay back all of the cash advances, any fees or costs financed as part of the loan, and all interest that has been charged to date. HECMs do not have to be repaid until the last surviving borrower has been unable to occupy the home for more than 12 consecutive months, dies, sells the home or permanently moves from the home. You may partially or fully repay the loan balance at any time. There are no prepayment penalties for a HECM. If your home is sold to pay off the loan, you or your estate will not have to pay back more than the amount received from the sale of the home.
A homeowner with a reverse mortgage has 3 main ongoing responsibilities.
You are required to make timely payments on your property taxes. Failure to do so could result in the loss of your home. You are required to make timely payments of premiums towards your homeowner’s insurance. Flood insurance is also required if the property is located in a flood zone. Failure to do so could result in the loss of your home. Your property must be maintained in at least the condition that it was in when the reverse mortgage was taken out. Lenders may perform “drive-by” inspections. If problems are identified, you will be required to remedy them. Be sure to ask your lender about other responsibilities you have once you have received your reverse mortgage.