Reverse Mortgages How they Work
Reverse Mortgages How they Work
If you’re 62 or older you may be beginning to do some financial planning for your retirement years. This is the time to take a good look at your projected income and plan how you want to allocate your resources.
Many people are including a Reverse Mortgage in their retirement financial package. The Reverse Mortgage allows you to make the equity that you have invested in your home work for you. Looking at Reverse Mortgages how they work should provide you with a solid overview of the program so that you can assess your situation and decide whether a Home Equity Conversion Mortgage (HECM) loan will be in your interests.
History and Objectives
The government-insured HECM loan dates back more than 20 years to the first pilot program that was launched in 1988. The program was administered by the Federal Housing Administration (FHA) and its success led the FHA’s overhead agency, the Department of Housing and Urban Development (HUD) to expand the project.
The Reverse Mortgage was designed as a way for homeowners aged 62 and older to access the equity that they had built up in their homes by accessing the money in the form of a loan. In this way, homeowners are able to use the influx of cash in a variety of ways including paying off an existing mortgage, covering healthcare costs, undertaking home repairs or helping their children financially, all while aging in their own homes.
When you’re investigating the Reverse Mortgage how they work you’ll need to start out with the issue of eligibility. You are eligible to apply for a HECM loan if you are 62 years of age or older, own your property outright or have already paid the majority of the mortgage, occupy the property as your principal residence and are not delinquent on any federal debt.
Your property must be a single family home or a 2-4 unit home with you living in one of the units. Alternate property options include manufactured homes (mobile homes) that meet FHA requirements or an HUD-approved condominium.
The amount of equity to which you are entitled is based on the age of the youngest borrower (meaning, if you are taking out the loan with your spouse, the age of the youngest spouse will determine the loan amount), the current interest rate, the lesser of appraised value or the sales price of the home or the HECM FHA mortgage limit of $625,500 and the type of loan that you choose (HECM Standard or HECM Saver).
You may choose your draw option based on one of the following payment plans:
- Tenure - equal monthly payments as long as at least one of the borrowers continues to occupy the property as a principal residence.
- Term - equal monthly payments for a specific period of months which the borrower selects
- Line of Credit - installments payments which can be paid whenever the borrower wises until the line of credit is exhausted.
- Modified Tenure - combination of scheduled monthly payments and line of credit for as long as you occupy the house as your principal residence
- Modified Term - combination of monthly payments and line of credit for a specific period of months as selected by the borrower.
You are responsible for maintain the loan costs, both those which include one-time payments and those which continue through the life of the loan. Loan costs involve:
- Mortgage Insurance Premium (MIP) insures that you will receive your expected loan payments. You can finance the MIP as part of your loan.
- Third Party Charges Closing costs include an appraisal, title search and insurance, inspections, surveys, recording fees, credit checks and mortgage taxes.
- Origination Fee compensates the lender for processing the HECM loan. A lender may charge a HECM origination fee of up to $2,500 if the home is valued at less than $125,000 or 2% if the home is valued at more than $125,000. If the home is valued at over $200,000 the lender can charge 2% of the first $200,000 plus 1% of the amount over $200,000. Origination fees are capped at $6,000.
- Servicing Fee covers the servicing for the life of the HECM loan. This includes account statements, disbursing loan proceeds and monitoring compliance with loan requirements such as maintaining the home, paying real estate taxes and paying a hazard insurance premium. The monthly servicing fee is added to the loan balance monthly.
Potential HECM borrowers must attend a counseling session with a HUD-approved counselor before submitting a formal loan application. At this counseling session the counselor will elaborate about the Reverse Mortgage how it works and can answer any questions.