If the FHA insured reverse mortgage, known as the Home Equity Conversion Mortgage (HECM), is anything, it is
an incredibly flexible financial instrument.
Do you need a monthly income from the HECM? It can do that.
How about a line of credit? Check.
You need a lump sum of cash? Double check.
You might be difficult to please and say “I want it all. Give me all of the above.” Triple check and mate!
Yes, the HECM reverse mortgage program can do all of this without requiring the homeowner to ever make a payment on the loan as long as he or she live
in the home, pays the property taxes and homeowners insurance on time and maintains the home.
Before we go much further, I do need to tell you that a HECM reverse mortgage is a loan specifically designed for homeowners age 62 and above. It allows
the homeowners to tap into a portion of the value of their primary residence without ever having to make a mortgage payment (unless they choose to).
The home stays in the name of the homeowner and they must continue to pay the property taxes and insurance on it as well as live there as their primary
residence and maintain the home. As long as at least one homeowner lives in the home, they never have to make a mortgage payment.
This is still a loan, interest is still charged, but the homeowner does not actually pay it. So what happens to it? The interest gets added to the loan
balance. Th loan balance increases over time. If the loan begins with a balance of $100,000, it could grow to $150,000 or $200,00 or more over time.
It is the job of the loan officer and housing counselor (because homeowners must talk with a revere mortgage housing counselor prior to obtaining a reverse
mortgage), to make sure that the homeowners understand this concept (called negative amortization), and that they are OK with it.
Now, back to the rest of the story.
I do, however, need to qualify the above statements with my favorite answer to most questions…it depends. It depends on the situation of the homeowners.
If the homeowners own their home free and clear, then yes, all of the above options are available to them. But if they have a mortgage on the home, that
existing lien must be paid off in full from the proceeds of the reverse mortgage before any additional funds can be used. This can limit, or possibly
even eliminate the other options.
For example, if someone has a $400,000 home that they own free and clear (no mortgage or other loans against it), they may qualify, depending up their
ages and the interest rate, for $220,000. These people have all the options listed above available to them. HUD (Department of Housing and Urban Development),
does limit the amount available during the first year to 60% of the amount available ($220,000 x 60% = $132,000). As long as they qualify under the
credit and income guidelines, the initial disbursement limit is the only restriction.
However, if they have a mortgage of $200,000 on the home, this loan must be paid off first, leaving them just $20,000 to spend as they choose. This amount
of money would only pay out a very small amount in a monthly payment, but they still have the option to take it as a lump sum, line of credit or a
combination of the two. Also, don’t forget the main benefit of this situation is that the homeowners get out from under the principal and interest
payment from the $200,000 mortgage saving them thousands of dollars per year.
Everyone’s situation is different, but the beauty of this program is ability to customize it to fit the needs of different situations.