By Randy Hutchinson
President of the BBB
Reprinted from The Commercial Appeal
I received a solicitation for an HECM loan saying I had “Estimated Funds Available” of $54,059. HECM stands for “home equity conversion mortgage” and is the FHA’s reverse mortgage program that enables you to withdraw a portion of your home’s equity to use for home maintenance, repairs, or general living expenses.
The solicitation says my “loan has completed its required seasoning” and a “beneficial change to mortgage terms may be available.” I’ve lived in my house for 25 years and never had a mortgage on it, so I found the solicitation to be, let’s say, “creative.”
But a reverse mortgage is a legitimate product for eligible borrowers who thoroughly understand the terms and conditions, which are very different from traditional mortgage loans. They can access their equity through a lump sum payment or installments without having to make payments toward the loan balance. It’s repaid when the borrower sells the house or passes away.
To apply for a reverse mortgage, you must be 62 years or older, have equity in the home, it must be your primary residence, and it must be in good condition. In addition to a single-family home, a multi-family home may qualify as long as one of the units is your primary residence. Other eligible property types include manufactured homes and HUD-approved condominiums. Vacation homes, secondary homes, and homes on income-producing land, such as a farm, aren’t eligible.
Factors such as your age, the type of product, the value of your home, and how much you owe on your home all contribute to the amount you may borrow. There typically aren’t any income requirements to get an HECM reverse mortgage. You have to meet with a counselor before getting an HECM reverse mortgage to help ensure it’s right for you.
Since no monthly payments are made, the balance on a reverse mortgage grows over time with the addition of interest and could end up equaling or exceeding the value of the home. If that happens, neither you nor your heirs will be responsible for paying the excess on an HECM loan when the home is sold. You are responsible for paying property taxes, insurance and maintenance costs. Depending on your financial situation, some proceeds from the loan may be set aside to pay these expenses.
The interest rate and costs for a reverse mortgage run higher than many traditional mortgages. Fees may include an origination fee, closing costs, a mortgage insurance premium, and a servicing fee.
The rules for whether a non-borrowing spouse can remain in the home after the borrower dies are complicated and should be discussed with the HECM counselor. Others living with the borrower would have to move out unless they buy the home and pay off the reverse mortgage loan. Heirs who want to keep the home would also have to pay it off.
Most reverse mortgages are federal HECMs, but some are offered by private lenders. Be sure you understand their terms, particularly whether you or your heirs might have to pay back any amount by which the loan exceeds the value of the home.
The FTC warns against being pressured to take out a reverse mortgage to buy other financial products, such as an annuity or long-term care insurance.