HECM & Reverse Mortgage: Myths & Facts
A reverse mortgage allows eligible borrowers of a certain age to tap the equity built up in their home while forgoing required monthly mortgage payments. Unlike a traditional mortgage that gets paid over a specific term, the balance and interest charged on a reverse mortgage are not due until the last borrower passes away or leaves the home. It’s important to note that reverse mortgages do have some obligations, like ongoing property taxes or homeowners insurance, but monthly mortgage payments can be avoided.
Over the years, increased government regulation and oversight have made reverse mortgages safe and effective strategic financial vehicles. Though many people continue to have misconceptions about these loans, reverse mortgages have evolved over the past decade. Now, certain safeguards are in place to protect consumers.
Do you have questions about HECM or reverse mortgages? Get in touch with one of our experts to get additional details on the available programs.
Types of Reverse Mortgages
The most common type of reverse mortgage is a home equity conversion mortgage, also known as a HECM. These mortgages are insured by the government and are subject to stringent regulations and protections. Often, when people talk about reverse mortgages, they are referring to a HECM — however, not all reverse mortgages are HECMs.
Home Equity Conversion Mortgages (HECM) are reverse mortgages. These are the most common and popular because they give borrowers flexibility and freedom with how they will use their proceeds. Borrowers can make payments without restriction or penalty to manage the loan balance if desired. They also come with additional government protection. Insured by the FHA, HECMs are non-recourse, which means the borrower or their heirs will never owe more than the home’s market value at the time it is sold There are also Purchase money loans —HECM for Purchase (H4P), and HECM to HECM refi (H2H).
How Does a Reverse Mortgage Work?
A reverse mortgage is a mortgage that, as its name implies, works in reverse. In a traditional loan, the borrower takes the proceeds up front and then pays them back with interest over a specified time period.
With a reverse mortgage, interest is added to the balance each month, but neither the accrued interest nor the loan balance is due until the loan ends. The borrower is not required to make monthly mortgage payments, but they do have financial obligations like ongoing property taxes and homeowner’s insurance.
Also, differing from a traditional loan, the length of the reverse mortgage is not a specific time period. Instead, the loan comes due when the last borrower passes away, moves out, or sells the home. With a reverse mortgage, the borrower has several options for how they will receive the loan funds: *
- A lump sum or partial lump sum payment
- Receive monthly payments
- Establish a Line of Credit
- Combination of the three
It’s also important to remember that a reverse mortgage is a growing balance loan which increases over time. If the borrower chooses at any time during the life of loan to make a full or partial pre-payment to manage the loan balance, there is no pre-payment penalty.
What are the requirements for reverse mortgage eligibility?
To apply for a home equity conversion mortgage (HECM), borrowers must be at least 62 years of age. Proprietary reverse mortgages may have different age requirements in different states. Contact our team to get specific information on your state.
To get a reverse mortgage, borrowers must be current on any federal debt. Reverse mortgage proceeds may be used to pay off existing mortgages, including FHA loans. Reverse mortgages typically require some equity in most cases, but there are exceptions and it’s best to discuss options with one of our experts. In most cases, reverse mortgage borrowers own their homes outright or have a substantial amount of equity built up
Reverse mortgages are for people who intend to live in their homes. Borrowers must annually certify that their mortgaged home is their primary residence and that they live there for the majority of the year
Though reverse mortgages do not require mandatory monthly mortgage payments, borrowers are still responsible for other fees and costs associated with home ownership. Borrowers must demonstrate that they can pay property taxes, homeowners’ insurance, homeowners association fees, home maintenance, and other costs required to maintain property
Reverse Mortgage Misconceptions
The Federal Housing Administration (FHA) now ensures approximately 99% of reverse mortgages. Borrowers are guaranteed their payments even if the lender goes out of business. Additionally, FHA-insured reverse mortgages are non-recourse, meaning that should the loan balance ever exceed home value, the borrower or heirs will not be held responsible for the difference between the loan value and the sale price of the home. Though reverse mortgages are safer than ever, myths and misconceptions persist. Mentioning reverse mortgages is likely to elicit a range of misguided and false beliefs. Despite facts to contrary, here are some of the common myths that stick to reverse mortgages:
Myth: You don’t own your home with a reverse mortgage
Untrue. The title stays in your name, and you are still the owner. It is no different than a traditional mortgage with respect to ownership.
Myth: The lender will take your home and your heirs won’t get it
Not exactly. Like a traditional mortgage, a reverse mortgage is a loan. If your heirs want to keep the home, they must pay off the loan, refinance it, or sell the home.
Myth: A reverse mortgage prevents you from selling your home
Not at all. You can still sell your home with a reverse mortgage. The home sale proceeds would be used to pay off your loan’s remaining balance and the remaining funds go to the seller.
Myth: Your spouse will be kicked out if you pass away
Not true. If there are multiple borrowers on a loan and one borrower passes away, the loan continues. There was a time when a surviving non-borrowing spouse not listed on the reverse mortgage did not have protections. Regulations now ensure that eligible non-borrowing spouses can stay in the house if they continue to meet loan requirements.
Myth: Your Social Security and Medicare will be impacted*
False. Social security and Medicare are not need based programs and as such are not impacted by recipients’ current finances.
Myth: Reverse Mortgages cannot be used to purchase a home
False. While most Reverse Mortgages are refinance transactions, certain investors have a purchase option as well. As a reminder the purchase must be for a primary residence and must begin occupancy within 60 days of closing.
Why do people take out reverse mortgages?
Another way that a reverse mortgage is different from a traditional mortgage is the flexibility it offers borrowers to use it in a way that suits their needs. Borrowers can use their funds in whatever way they choose. In addition to repayment flexibility, reverse mortgages allow borrowers to use loan proceeds for any purpose. Some of the most common ways people use reverse mortgages are to:
Increase Cash Flow
In addition to allowing people to tap equity through monthly payments, the removal of monthly mortgage payments with a reverse mortgage offers increased cash flow.
Pay Down Other Debt
Borrowers saddled with high medical bills, credit card debt, or another substantial financial obligation may find a reverse mortgage offers them the ability to get out from under it.
Help heirs now
Reverse mortgage borrowers can use the proceeds to help a grandchild get through college or make another gift to their heirs during their lifetime.
Do something for yourself
In retirement, cash flow may be tight in certain seasons, but with a reverse mortgage, borrowers can have the freedom to splurge on a vacation, home renovation, or something else without withdrawing from savings or cashing in other assets.
How can I get more info on a Home Equity Conversion Mortgage?
Do you want to apply for a HECM mortgage? You’ve come to the right place. Get additional information on our available programs, and contact us to get started on your path to a HECM. Converting your home’s equity into capital is closer than you think!
* Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable rate mortgages.*
* Consult a financial professional. Visit www.ssa.gov
This is not a commitment to lend. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid. Otherwise, the loan must be repaid when the last borrower passes away or sells the home. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. is not affiliated with or acting on behalf of or at the direction of HUD, FHA or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan or use other assets to repay the loan in order to retain the property. You should know that a reverse mortgage is a negative amortization loan which means that your mortgage balance will increase while your home equity decreases if you do not make principle and interest payments on your loan. This may make it more difficult to refinance the loan or to obtain cash upon the sale of the home. However, you will never owe more than the home is worth when the loan is repaid.