A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan. A reverse mortgage enables seniors to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments.2 You can receive your loan proceeds as a lump sum, monthly payments, line of credit, or a combination of monthly installments and a line of credit to use when needed. The loan typically becomes due when the last surviving borrower dies, sells the home, or permanently moves out.
The amount of money you can receive depends on a few factors, including the age of the youngest borrower on title or eligible non-borrowing spouse, current rates, and the lesser of the appraised value, sale price, or maximum lending limit. To qualify for a reverse mortgage, you must be at least 62 or older. The spouse can be younger, but would not be included on the loan as a borrower. Typically, the older the borrower is, the more money they will be eligible to receive due to their shorter life expectancy. Reverse mortgages are available in fixed and variable rates. The variable rate is tied to the London Interbank Offered Rate (LIBOR) index. The maximum lending limit for a HECM just recently increased in 2017 and is now $626,150.3
There are a number of good calculators available online to help you calculate how much you may be eligible for. According to Eric Mehan, owner/broker of Golden Opportunity Mortgage in CA, when it comes to approximating how much a 62 year old could receive from a HECM loan, a good rule of thumb is taking fifty percent of the home’s value. For example, if a 62 year old owns a home worth $400,000, then the borrower may be eligible for about $200,000. “For older borrowers, the loan amount increases a little bit for each additional year of the youngest borrower’s age.”3
When you get a HECM, any existing loan must be paid off using the proceeds from the reverse mortgage. This would include a conventional mortgage, a home equity line of credit or any other unpaid liens. In fact, one of the main reasons seniors tap into their home equity through a HECM loan is to pay off their existing mortgage. Freeing up these funds can substantially increase their monthly cash flow and help to supplement retirement income.
Following a program change in 2013, the amount of money the borrower can access in the first 12 months after loan closing is limited to 60% of the funds available, plus an additional 10% in certain cases. The borrower may be able to access more under certain circumstances, but doing so will impact the amount of mortgage insurance premium (MIP) the borrower will pay.
There is a common misconception that once you get a reverse mortgage, you no longer own the home. This is untrue as the borrower maintains the title. Therefore, as with any loan, the borrower must continue paying for taxes and insurance, as well as keep up with home repairs and maintenance. Consequently, it’s important to factor in these costs when considering a reverse mortgage.
New eligibility requirements for a reverse mortgage now include a financial assessment to evaluate a borrower’s ability to pay their property taxes and homeowner’s insurance. As a result of this assessment, borrowers may be required to set aside a portion of the loan proceeds to pay for taxes and insurance. However, doing so may reduce how much cash the borrower will receive.
If you’d like to learn more about reverse mortgages and how much you could qualify for, please use our Reverse Mortgage Calculator or call 800-218-1415.
1 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
3 5 Factors That Help Determine the Size of a Reverse Mortgage Loan – bankrate.com, 11/2/16, http://www.bankrate.com/finance/mortgages/factors-in-reverse-mortgage-payout-1.aspx.
Author: Meredith Manz