You have probably heard about reverse mortgages. But do you really know what they are the circumstances in which you would use them. There are several different types of reverse mortgages. Since it is reported that more than 99% of the reverse mortgages issued are a Home Equity Conversion Mortgage (“HECM”), we will be limiting our reverse mortgage discussion today to HECMs.
HECMs are the Federal Housing Administration’s (“FHA”) reverse mortgage program, which is backed by the U.S. Department of Housing and Urban Development (“HUD”). For purposes of today’s discussion, I will be using “reverse mortgage” and “HECM” interchangeably.
What is a reverse mortgage? A reverse mortgage is a special type of mortgage that differs from a traditional mortgage or home equity loan in that it does not require regular monthly payments during the term of the loan. So long as you continue to meet the requirements of the loan, you can take advances on the loan, but need not make any monthly payments. The loan does not need to be repaid until you no longer use the home as your principal residence or otherwise fail to meet the requirements of the loan.
Who can get an HECM? If you are 62 years of age or older, own and reside in your home which has built up adequate equity and, after September 30, 2013 have received consumer information from an HECM counselor, you may be eligible. If you have a spouse and/or children on the title and who are under 62, their names must be removed from the title to the home before you can qualify for a reverse mortgage. All title holders to the home must be at least age 62.
What types of homes qualify? To qualify for an HECM, your home must be a 1-4 family home in which you occupy at least one unit as your primary residence. Certain HUD-approved manufactured homes and condominiums that meet FHA guidelines are also eligible.
If no monthly mortgage payments are necessary, what about taxes and insurance? You are still required to pay your real estate taxes, maintain homeowners insurance and pay all other required property expenses, such as condominium or homeowners association fees, utilities, maintenance, etc. Under new rules effective January 13, 2014, after a financial assessment, you may be required to have a set aside account to fund these expenses. A set aside account is like an escrow account with a traditional mortgage.
How much money can I borrow? The amount of money that you can get from a reverse mortgage varies. It is dependent upon the current interest rate, the age of the youngest borrower, appraised value, HECM FHA mortgage limit, purchase price of new-to-you home, and initial Mortgage Insurance Premium.
Under new rules effective September 30, 2013, there will be lesser amounts that you can borrow than under the prior rules. Generally, the older you are, the more valuable your home is and the lower the interest rate, the more you can borrow. For an estimate of the amount that you can borrow, select the online calculator on the HECM homepage at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmhome.
How do I get my money from my reverse mortgage? According to the HUD website, there are five types of 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.
When or why would I use a reverse mortgage? The only time I have seen reverse mortgages used is as a last resort bailout when homeowners have no other options. If you have no assets other your home, your monthly income is insufficient to pay your regular monthly expenses and you want to stay in your home, you may be a reverse mortgage candidate. In such instances, if you didn’t use an HECM, you would not be able to stay in your home. Without the HECM, you would either have to sell your home or lose it due to the lack of payment of your traditional mortgage or taxes.
How much should I pay a service to find a reverse mortgage for me? Nothing! The FHA recommends that you do NOT use a service that charges a fee to locate an approved lender. You should be able to find a lender for free by searching online at www.hud.gov or by contacting an HECM counselor. HECM counselors can be found online or by calling 800.569.4287 toll-free.
Is there a way out of the reverse mortgage after I have closed? With most reverse mortgages, you can cancel the loan for any reason, without penalty within at least three business days after closing. Your cancellation with the lender must be in writing. I recommend that you mail your cancellation notice certified mail, return receipt requested in order to document who received what, when.
Do my loved ones get anything after I am gone? Because no monthly payments are made on a reverse mortgage, the balance increases over time, instead of decreasing as is the case with a traditional mortgage. Generally, if the amount borrowed from a reverse mortgage, together with interest, fees and costs is less than the value of your home at the time the loan is due when the home is sold or no longer used as your principal residence, then there would be some equity that you could pass on to your loved ones upon your death.
HECMs differ from traditional mortgages in the event the balance of the loan exceeds the value of your home. In such instances, you or your estate typically do not have to pay the lender the excess of the debt over the value of your home at that time. This provision is referred to as non-recourse. No debt is generally transferred to you, your estate or your loved ones, but the lender keeps the home. If however, you or you loved ones want to keep the home in the family, the total balance of the loan may have to be paid, even if it exceeds the value of the home.
By: Matthew M. Wallace, CPA, JD
Published edited September 15, 2013 in The Times Herald newspaper, Port Huron, Michigan as: What reverse mortgages are and why you might use one