The Home Equity Conversion Mortgage (HECM), also called a reverse mortgage, is an ingeniously constructed financial instrument that can meet a wide variety of needs of homeowners age 62+. In addition to its versatility, HECMs are also extremely flexible, permitting changes in the ways in which seniors receive funds as their needs change over the years.
What is a Reverse Mortgage?
A reverse mortgage is a home-secured loan that can turn part of the equity you’ve built up in your house into funds you can use today, or a line of credit that will be there when you need it. A reverse mortgage is a great way to access your home’s equity to supplement your income, establish a “rainy day fund” or meet a variety of other financial goals. And with its flexible repayment option, it offers homeowners greater control over their finances.
Specifically designed for homeowners age 62+, it offers all the benefits of a traditional line of credit that you can get from a bank but with additional benefits — including a flexible repayment feature.
How much can you receive?
The amount that is available generally depends on four factors: your age, the current interest rate, the appraised value of the home, and government-imposed lending limits*.
What Are the Requirements for Obtaining a HECM Reverse Mortgage?
You must be 62 years of age or older and have significant equity in either a home that is your permanent residence, or one you plan to purchase using the reverse mortgage. The house must be single family, in a 2-to4 family structure, in an FHA-approved condominium, or an approved manufactured home
Any existing mortgage on the home must be paid off when you obtain the HECM. Hence, it cannot be larger than the maximum cash draw available on the reverse mortgage unless the senior wants to tap other funds to make up the difference. Some seniors might find it advantageous to do this in order to eliminate the payment on the existing mortgage.
How Are a Borrower’s Rights of Ownership Affected by a HECM Reverse Mortgage?
They are affected only in that a lien is placed on the property to assure that the borrower meets the obligations specified in the loan contract. This is the same as with a standard mortgage, except that with a standard mortgage, borrowers have a monthly payment obligation and on a HECM reverse mortgage they don’t.
What Are the Borrower’s Obligations on a HECM Reverse Mortgage?
While there is no loan repayment obligation on a HECM, the borrower is obliged to pay the property taxes, to keep adequate homeowners’ insurance in place, and to maintain the property. A borrower who has someone living with them who is not a party to the HECM contract, such as a boarder or dependent child, also has a moral obligation to that person. The obligation is to inform that person that they will have to vacate the house if the borrower dies or moves out of the house permanently.
How Does a Reverse Mortgage Affect the Size of the Borrower’s Estate?
The borrower’s estate receives the equity in the property at the time the borrower dies or moves out permanently. The equity equals the property value net of transaction costs realized through the sale, less the balance on the reverse mortgage.
Some HECM options deplete the estate more than others. Cash withdrawals at the beginning will reduce it the most, credit lines that are rarely used will reduce it the least, and monthly payment plans are somewhere in-between. In general, the longer the borrower remains in the house, the larger the depletion of equity.
Can the Borrower’s Estate Obtain Title to the House After the Borrower Passes?
Yes, by paying off the HECM debt. If the value of the house exceeds the debt balance, no problem arises. But if the debt balance is more than the house is worth, the estate must decide whether they want to incur the deficiency.
Are Seniors Who Take Out a HECM Reverse Mortgage at Risk of Losing Their Homes?
HECM borrowers retain legal ownership of their homes, in the same way as those who take a standard mortgage. In both cases, the only risks are those associated with borrower failure to meet their obligations under the mortgage contract, which means that the risk is entirely under their control.
While borrowers under a reverse mortgage contract have no obligation to make mortgage payments, they are obliged to pay their property taxes, keep their homeowners insurance current, and maintain their property.
What Happens to the Borrower if the Debt Exceeds the Value of the Property?
Nothing happens to the borrower, who retains the right to live there. The loss that occurs after the borrower dies or moves out permanently is absorbed by FHA’s HECM reserve fund, which is financed by the mortgage insurance premiums paid by borrowers.
What Are the Options a Borrower Has for Drawing Funds on a HECM?
They can draw cash at closing, they can receive a monthly payment for a specified period or for as long as they reside in the house, and they can take a credit line upon which they can draw at their discretion at any future time. In addition, they can combine options, such as a cash withdrawal plus a monthly payment. They can also switch from one option to another, converting a monthly payment plan into a credit line, for example, or the reverse.
Must I Pay Income Taxes on Funds Received from a HECM?
No, because the funds received are loans to you and loans are not taxable.
Will a HECM Reverse Mortgage Cause Me to Lose Public Assistance?
While eligibility for Medicaid and Supplemental Security Income (SSI) limits liquid assets to $2,000 for an individual and $3,000 for a married couple, it should be relatively easy to draw HECM funds as they are needed, avoiding sizeable asset accumulations. A HECM credit line is not counted as a liquid asset.
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