A Reverse Mortgage or Home Equity Conversion Mortgage (HECM), is an option for a person who is 62 years or older. This mortgage allows the homeowner to receive payment based on the equity of the home as long as it is the primary residence of the owner. In order to qualify for a reverse mortgage you also must own your home or have a small mortgage balance. However, it is also possible for someone to use a reverse mortgage to buy a house assuming the purchasers have cash to pay any gap between the money they receive from the mortgage and the price of the house while also paying for any closing costs.
What are the Financial Requirements
There are no income requirements in order to receive payments from HECM, and, while the home remains your primary residence, payments will be made to you and you will not need to repay the loan.
The Payment Plans
There are five ways that a homeowner can receive payments and they include:
- Tenure - the monthly payments are equal for the life of the loan (This is available only if at least one borrower is living and the property remains the primary property)
- Modified Tenure -this allows you to have both fixed monthly payments and an available line of credit.
- Term - the monthly payments are fixed for a period of months you select
- Modified Term -this allows you to have both payments fixed for a set term and a line of credit
- Line of Credit - you can take payments at any time you choose, until you have met the maximum line of credit you are permitted to borrow
In addition, if you are unhappy with the payment plan you selected you may change your plan for a 20$ fee.
What is the Mortgage Amount Based On?
The total amount you are permitted to borrow is based on the age of the youngest borrower, the interest rate at the time you take the loan, and what the home is worth according to an appraisal. As a rule, the older you are, the more the house is worth, and the lower the interest rate is, the more money you will receive. If there are two or more homeowners it is the age of the youngest person that counts.
Costs and Fees
In general, costs associated with a reverse mortgage or HECM can by paid out of the money from the loan, on the downside, this decreases the amount given to you.
- Origination fees- this pays for the processing of your loan which can range from $2,500 to $6,000. It is paid to the lender
- Closing costs- these can include a third party appraisal, a search and title insurance to ensure clean title , insurance, a check of your credit and any additional related fees
- Mortgage Insurance- Reverse mortgage insurance is required, but you can roll the cost of the premiums into your loan
- Servicing Fee- This is added to your loan balance every month
- Interest- You generally have a choice between either a fixed or adjustable interest rate
Repaying the Loan
If you die or sell the house, the loan must be repaid in full. You also must repay the loan if you don't pay your property tax, you relocate or move to a different house, you are absent from the house for 12 months or more in a row, or you let the house fall into disrepair.
