The Different Types of Reverse Mortgages
There are many different types of reverse mortgages; some with adjustable rates, some with fixed rates, some FHA-insured, and some not. We are a brokerage which allows us access to the various reverse mortgage programs- there isn’t a reverse mortgage that we can’t offer.
- The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the FHA. To learn more about HECM loans, watch this video on our website here.
- An alternative option is a proprietary reverse mortgage, which is not insured by the federal government and therefore is not a HECM loan. Learn more about our proprietary programs on our website here.
Understanding HECM Reverse Mortgages
A Home Equity Conversion Mortgage (HECM) is an FHA loan available to seniors aged 62+ that requires no monthly mortgage payments. The HECM reverse mortgage pays off any current mortgage they may have, freeing up the cash they had needed previously to make their monthly mortgage payment and allowing for more discretionary income. If the homeowner qualifies for more cash than the balance of their current mortgage or does not have a mortgage on their home, the funds can be paid to them as cash, a line of credit, or monthly payments; it is their choice how to take their funds. The amount a person may qualify for is determined by their age, the value of the home, and the current interest rates. The funds can be used for anything they may want or need, such as home improvements, unexpected medical costs, and in-home care. Because the loan does not require monthly mortgage payments, it allows the homeowner the flexibility to retain ownership of their home while they utilize the equity to fund their retirement. HECM reverse mortgages are the most common type of reverse mortgage. All HECMs are reverse mortgages but not all reverse mortgages are HECMs; some reverse mortgages are proprietary loans available through specific lenders and are not FHA insured. HECM reverse mortgages were created to give seniors aged 62+ access to funds to stretch their retirement savings and provide additional financial security. To learn more about proprietary loans, click here. Ultimately, the goal of the HECM reverse mortgage program is to allow seniors to maintain their homeownership and live a more quality life.
1. **Unlocking Home Equity:**
- HECM reverse mortgages allow homeowners aged 62 and older to convert a portion of their home equity into loan proceeds, providing a financial cushion during retirement.
2. **Federally Insured Protection:**
- As a government-insured program, HECM reverse mortgages offer added consumer protection, ensuring that borrowers receive their promised loan advances.
3. **Flexible Payout Options:**
- Borrowers can choose to receive their funds as a lump sum, monthly payments, a line of credit, or a combination, providing flexibility to meet individual financial goals.
How Does a HECM Reverse Mortgage Work?
A HECM reverse mortgage allows homeowners aged 62+ to borrow money based on their age, their home’s value, and current interest rates. Older people qualify for a more significant percentage of home equity than younger people do. Making monthly mortgage payments on what is borrowed is optional and some people do choose to pay down the loan balance, but monthly mortgage payments are never required.
This type of loan is called a HECM reverse mortgage because instead of the borrower making monthly mortgage payments to their lender as they would with a traditional mortgage, the lender pays the borrower. Unlike a traditional home equity loan or second mortgage, a HECM reverse mortgage does not have to be repaid until the borrower no longer occupies the home as their primary residence or fails to meet other obligations of the loan. The borrower can receive their money as a lump sum, line of credit, or monthly payments.
Is a HECM right for you? Every situation is unique, click here to see our helpful infographic that may guide you to the optimal decision for your situation.
HECM Reverse Mortgage vs. a Traditional Mortgage
With a traditional mortgage or home equity loan, the homeowner must have the income and credit to meet the qualifications to borrow a large amount of cash and are then obligated to make monthly mortgage payments back on it or risk foreclosure. With a reverse mortgage, there are minimal qualifications and no monthly mortgage payments to make. As a consumer protection, borrowers have to prove they can maintain their property taxes and homeowners insurance. Depending on how much cash you may qualify for, you may gain access to a reverse mortgage line of credit that can grow over time and cannot be frozen, giving you tax-free access to your equity whenever you may need it.
What Are the Benefits of a HECM Reverse Mortgage?
A HECM reverse mortgage allows homeowners aged 62+ to convert home equity into flexible, tax-free income to use however they want and:
- Continue to live in and own your home without making monthly mortgage payments.
- Receive your cash benefit as a tax-free lump sum, monthly payments to you, a line of credit, or a combination of these, giving you the flexibility and control to adjust your payment options as needed.
- Repay the loan or make optional monthly mortgage payments at any time without penalty.
- HECM loans are not considered income, are not taxed, and will not affect Social Security or Medicare benefits. Consult your local program offices to determine how, or if, monthly HECM loan payments might affect your eligibility for other programs.
- There is no time limit to how long the loan stays active.
- Safeguard Against Market Fluctuations: HECM reverse mortgages are non-recourse loans, ensuring that borrowers or their heirs are not responsible for repayment beyond the home's value, even if it depreciates.
Understanding HECM Reverse Mortgage Costs
As individuals approach retirement, exploring financial solutions that offer security and flexibility becomes paramount. HECM reverse mortgages emerge as a viable option, providing a unique avenue for homeowners to tap into their home equity.
Costs Associated with HECM Reverse Mortgages:
4. **Origination Fee:**
- HECM reverse mortgages may include an origination fee, covering the lender's processing costs. This fee is typically calculated based on the home's value. The origination fee is government-regulated and cannot exceed $6000.
5. **Mortgage Insurance Premium (MIP):**
- The Federal Housing Administration (FHA) requires an upfront and ongoing Mortgage Insurance Premium. This insurance protects both the borrower and the lender, ensuring loan repayment and the non-recourse feature.
6. **Appraisal and Closing Costs:**
- Appraisal fees and closing costs are part of the HECM process. These costs cover property valuation and the administrative expenses associated with closing the loan. The appraisal fee is often an up front cost paid by the client before the loan closes but the closing costs are included in the loan unless the client elects to pay them out of pocket.
HECM reverse mortgages offer a powerful financial tool for those seeking to bolster their retirement income. While there are costs associated with obtaining a HECM reverse mortgage, the benefits, including financial flexibility and homeowner protections, make it a compelling option. As with any financial decision, it's crucial to consult with a qualified HECM specialist to assess individual circumstances and ensure informed choices on the path to financial freedom.
Would you like more cash in your pocket? Wondering how much you may qualify for? Call us today at 800-806-1472 or fill out the form on the top right of this page for more information.
