A Home Equity Conversion Mortgage (HECM), commonly referred to as a reverse mortgage, is a Federal Housing Administration (FHA) loan program designed to enable older adults to access the equity in their home without having to sell the property, relinquish title or borrow additional funds. Unlike other home equity loans, repayment of a reverse mortgage is not required as long as you remain in your residence. In 2010, reverse mortgage loans are insured by the federal government to a maximum of $625,000.
Qualifications
To qualify for a reverse mortgage a homeowner must be at least 62 years old and hold a title to a single-family home, townhouse, condominium or owner-occupied property with no more than four units. The net value of your home, the current interest rate and any lending limits particular to your geographical area determine the amount of money you may qualify to receive.
Features
Proceeds from the reverse mortgage are paid in one lump sum, in monthly installments or by withdrawal from a predetermined line of credit. The homeowner holds the deed to the home until death, and may remain in the residence even if the loan is paid in full. Heirs to the property retain the option to refinance the home to pay off the mortgage, or sell the property outright to retire the outstanding debt. If the proceeds from the sale of the house are not enough to pay the outstanding balance on the loan, a provision known as a "non-recourse limit" prohibits the lender from seeking other assets to retire the debt.
Requirements
In order to qualify for a reverse mortgage, the homeowner is required to seek counseling to learn how the program works, the application process and the legal and financial obligations if the loan is approved. Counseling can be in person or by telephone with an approved counseling agency. If the home is not owned free and clear, funds from the new mortgage can be used to pay any outstanding loans on the property, says the National Reverse Mortgage Lenders Association. Proceeds from the reverse mortgage are not taxable and do not affect eligibility for federal benefit programs.
Expenses and Interest Payment
As the population ages, reverse mortgage programs are becoming increasingly popular. Although the costs for reverse mortgage are often greater than a standard mortgage, expenses such as appraisals, mortgage and title insurance and mortgage origination fees can be paid with the proceeds of the loan. The homeowner must understand that the interest accrued on the loan is added to the outstanding balance on the loan each month.
Considerations
Caution should be used when shopping for a reverse mortgage lender. Mortgage brokers earn substantial fees from making loans, and some may encourage older clients to sell their homes when it is not in their best interest to do so. The American Association of Retired Persons (AARP) advises homeowners to carefully consider the pros and cons of a reverse mortgage and to investigate other alternatives before making a long-term commitment.
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