Considering a HECM loan? Prepare Yourself to Get the Most out of your Reverse Mortgage
Imagine that you’ve been blessed with a wonderful family, good friends and a supportive community. Your children are off on their own and they’re not interested in living in your house when you no longer need or want to live there. You might want to leave it to the kids so that they can sell it and divide the proceeds among themselves. However, if you feel that you could benefit from an infusion of some extra cash of your own you can mortgage your home to a lending institution under the HECM program and continue to live in the home while you draw on the equity that you have in the house.
Types of Reverse Mortgages
There are two main types of Reverse Mortgages so it’s important to know the differences. Being prepared allows you to choose the option which is right for you.
Reverse Annuity and Home Equity Conversion Mortgages
Both the proprietary reverse annuity mortgage and the Home Equity Conversion Mortgage involve an agreement between you and the lender in which you borrow against existing equity in your home.
The Home Equity Conversion Mortgages (HECM). which is insured by the FHA, is the most common of the two.
HECM loans allow you to access a percentage of your home’s worth and draw the money in monthly payments or as a line or credit. This type of loan gives you the flexibility to have an infusion of ready cash. Your payments are delivered in increments to make sure that you don’t run out of income as you age. One of the biggest benefits of the HECM loan is that it is backed by the FHA which protects your investment.
The HECM program offers two options – you can access your home equity as cash (Standard HECM) or use your home equity to purchase another home (HECM for Purchase). Either way, you must meet the program’s guidelines which demand that you demonstrate that you are able and willing to meet your loan responsibilities. You will be obligated to pay the monthly interest payments, stay current on your homeowner’s insurance and property tax payments and maintain the home.
You must also pay the loan’s third-party costs which include an appraisal of the property, surveys, inspections, title search and insurance, recording fees, mortgage taxes, credit checks and monthly management fees.
The biggest benefit of this type of Reverse Mortgage is that you are protected, through the FHA’s insurance fund, if your lender is no longer able to carry your loan.
To qualify for a HECM loan you must
· be at least 62 years old.
· show proof that your home meets certain building requirements.
· have equity on your home.
· have undergone reverse mortgage counseling.
· show proof that you are able and willing to maintain the loan (good credit statement, past financial history, other income, etc)
Private (Proprietary) Reverse Mortgage
There are also non-FHA backed loans, commonly referred to as a private or proprietary reverse mortgage. These types of mortgages are solely based upon existing home equity and income and credit scores. They often come with higher interest rates and higher fees than the HECM loan because they are privately backed and are offered by private lenders.
Research all of your options if you are considering a reverse mortgage loan.