A reverse mortgage is a financial product that allows Americans who are 62 or older to receive money in exchange for home equity. The most popular variety is the Home Equity Conversion Mortgage, often abbreviated to HECM, which is a program insured by the federal government. Although HECM loans are insured by the Federal Housing Administration (FHA) / Department of Housing and Urban Development (HUD), you do not get a reverse mortgage directly from the government. Instead, you work with a private lender, with the government setting rules and providing insurance for which you will pay a fee.
Am I Eligible?
Compared a conventional home loan, the HECM requirements are relatively straight forward. You must be 62 or older, live in your home as your primary residence, and have substantial home equity. If you still have a mortgage on your home, you must be able to pay it off with the proceeds. Most FHA approved condos and one to four family homes qualify. If you live in a manufactured home, it is a bit more complicated.
HUD also requires that every borrower take part in a session with an approved housing counselor before closing a reverse mortgage. This is a safeguard to help ensure that the senior fully understands the loan and is making a sound financial decision.
Beginning in 2015, borrowers must also pass a financial assessment to determine that they can continue to make property insurance and tax payments. Prior to enacting this rule, a high percentage of HECM borrowers (perhaps up to 10%) failed to make these payments. Since you must continue to pay taxes and insurance if you live in your home without a reverse loan, many argue that this financial assessment should not be a huge obstacle to most borrowers.
How Much Can I Receive?
HUD and the FHA set what’s called a principal limit for all borrowers, which dictates how much you can receive from a HECM. This limit is calculated by factoring in the interest rate, the home value, and the borrower’s age (if there’s more than one, the youngest borrower is used for the calculation). As of this writing, the most that a borrower can receive is $625,500.
As a general rule of thumb:
- Higher interest rates mean you will receive less
- Older borrowers will receive more than younger borrowers
- Higher home values mean more borrowing power
How Much Does It Cost?
When taking out a reverse mortgage, there are three major costs to consider:
- Origination fee
- Upfront mortgage insurance premium
- Closing costs
Origination fee is paid to the reverse mortgage lender. The maximum fee that a lender can charge is calculated based on a formula set by HUD.
Upfront mortgage insurance premium is paid to the FHA for insuring your loan. It is calculated as a percentage of your home’s value.
Closing costs include fees for your appraisal, title insurance, and so on.
Typically, these upfront costs are financed into the loan and thus are paid with the borrower’s home equity.
Over the life of the loan, the borrower must continue to pay property taxes and homeowners insurance, a mortgage insurance premium, and interest on the balance of the reverse mortgage.
Can the Borrower Remain in His or Her Home?
Yes, so long as the home continues to be used as a primary residence and the borrower continues to make tax and insurance payments. The loan becomes due when the homeowner stops using the home as a primary residence for more than 12 months, passes away, or sells the home.
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