A Home Equity Conversion Mortgage, (HECM), commonly known as a reverse mortgage loan, is a Federal Housing Administration (FHA) insured loan1 which allows you to access a portion of your home’s equity without having to make monthly mortgage payments.2 If you are at least 62 years old and have sufficient equity in your home, you may be able to get the cash you need.
One benefit of a HECM is there are no monthly mortgage payments.2 If you still have a mortgage on your home, it must be paid off using the proceeds from your HECM loan. If you don’t have a current mortgage, it increases the amount of money you may be eligible to receive. You also need to continue to reside in the home as your primary residence and continue to pay the required property taxes and homeowner’s insurance and maintain the home according to FHA requirements.
The amount of funds you can receive is determined by the age of the youngest borrower (or non-borrowing spouse)3, the lesser of the appraised value of your home, sale price or the FHA national lending limit, (which is $726,625 for 2019), current interest rates and the remaining balance of your existing mortgage (if applicable) and any other mandatory obligations.4 You can use these funds to complete home renovation, pay off medical bills, vehicle loans or consolidate other debt, improve your cash flow or have a ‘safety net’ for those unplanned expenses.
How will you get your money? There are a few disbursement options available. One option is in a lump sum which is only available with a fixed-rate loan.
However, if you choose to get an adjustable-rate HECM loan, you can select equal monthly payments (Tenure), equal monthly payments for a fixed period of months (Term), draw at any time and in any amount of your choosing from the preset amount (Line of Credit), combination of a line of credit plus scheduled monthly payments (Modified Tenure), or a combination of line of credit plus monthly payments for a fixed period of months (Modified Term).
A jumbo reverse mortgage, also known as a proprietary reverse mortgage, is designed to help owners with higher-value homes. A jumbo reverse mortgage is not FHA insured. Traditional HECMs limit borrowers to a maximum claim amount of $726,625 whereas a jumbo reverse mortgage allows borrowers to access up to $4,000,000 (depending on the lender).
HECMs limit the amount of proceeds available to the borrower in the 1st year. This is referred to as the Initial Disbursement Limit, which is calculated as 60% of the principal limit, or mandatory obligations plus an additional 10% of the principal limit.5 Jumbo reverse mortgages allow borrowers to receive the full amount of proceeds upfront, immediately after the loan closes.
If you are interested in learning more about reverse mortgages, call 800-976-6211 to speak with a licensed reverse mortgage advisor.
1 As required by the Federal Housing Administration (FHA), you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
2 Your current mortgage, if any, must be paid off using the proceeds from your HECM loan. You must still live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
3 A spouse must meet the following requirements to be considered eligible: 1) Be the spouse of the reverse mortgage borrower at the time of loan closing and remain the spouse of the borrower for the duration of the borrower’s lifetime. 2) Be properly disclosed to the lender at origination and specifically named as a Non-Borrowing Spouse in the loan documents. 3) Occupy, and continue to occupy, the property securing the reverse mortgage as the principal residence.
4 Mandatory obligations are those fees and charges, as defined by HUD, incurred with the origination of the HECM loan that are paid at closing or during the first 12-month disbursement period. This includes but is not limited to: the loan origination fee; counseling fee; up-front MIP; third-party closing costs; customary fees and charges for warranties, inspections, surveys, engineer certifications; repair set-asides; set-aside for property taxes and insurance; and delinquent federal debt.