Intro to Reverse Mortgage
Introduction to Reverse Mortgages
A reverse mortgage, also know as the FHA HECM (Home Equity Conversion Mortgage), is a federally insured loan that allows you to convert some of the equity in your home into tax-free cash. It is a unique loan that is easy to obtain if you are at least 62 years of age and own your own home or condo. You always remain the owner of your home.
A Reverse Mortgage is a “unique home loan” because:
No monthly mortgage payments are required. Interest and servicing fees accumulate over time. This means that the amount that becomes due will be slowly increasing over time because mortgage payments are not required.
There are no income or credit requirements. This means if you have poor credit, no income and no other assets besides a home with equity, you could obtain a reverse mortgage to raise money for a variety of needs.
Reverse mortgages are non-recourse loans. The last thing a senior wants is to leave behind a financial burden to their heirs. Because these loans are insured by the federal government, there is no liability to you personally, your estate or to your heirs. You will never be liable for a loan balance should it exceed the value of your home. This is an incredible feature. Compared to a traditional mortgage, if the same scenario did happened, the bank could sue you for the difference. This could never happen with a reverse mortgage.
It frees up a portion of the home’s value that you can convert into cash. It provides a wonderful way for you to tap into your equity without selling and without obtaining a loan with monthly payments. Many surveys indicate that a majority of seniors prefer to remain in their homes.
You can receive the proceeds in a variety of ways. The use of funds is limited only by your own creativity. You can receive money each month, take a lump sum, a partial lump sum or put the money in a reverse mortgage line of credit. Once you make a choice, you can always change your mind. You are never locked in to a particular way to receive your money.
A reverse mortgage is 100% risk free. This concept is not spoken about enough. First, no document requires that you continue the application process if you subsequently have a change of mind. Second, every reverse mortgage applicant is required to speak with a HUD-approved counselor. The purpose of the independent counseling is to insure that you understand the concept and are not coerced into action. This is a 100% risk free loan.
The Growing Line of Credit*. Perhaps the most attractive HECM feature is that its credit line grows larger over time. This means that the amount of cash available to you increases on a monthly basis until you withdraw all of it. You will never find this feature in any other kind of loan product. Assuming you placed your available cash in the line of credit (instead of receiving cash with a lump sum or monthly payments), your credit line will grow at a rate that is slightly higher than the current interest rate being charged on the loan. Here is an example based on a 70 year-old borrower that owns his/her home free and clear.
(*Line of Credit feature is only available with the adjustable rate option. Figures above based on interest rates as of 12/01/09.)
