This government-backed loan can be a useful financial tool for seniors, but you must first decide if one is right for you. The following information on reverse mortgages is designed to help you understand what programs are on offer, who's eligible, how much you can expect to receive, how you will get paid and, importantly, if it's your best option.
The first government program was made available in 1989 when Home Equity Conversion Mortgages, more commonly known as a HECM reverse mortgage, was issued by the U.S. Department of Housing and Urban Development (HUD) and was government insured by the Federal Housing Administration (FHA).
Being backed and insured by the government was an important step. It meant seniors could rest safely in the knowledge that they would not lose their homes or payments from lenders - they would always receive what they were owed, no matter what.
No matter what program you choose the following applies to all. You have to be 62 years of age or over to apply. You have to have no mortgage left (or very little left) on your home. None require income or health checks, though each requires credit checks (more about that later).
A traditional home equity loan gives you a lump sum of money based on the equity in your home. Anyone can apply and each month the borrower must make repayments against the capital and interest that is owed. You risk loosing your home should your missed repayments. As you pay back the loan the equity in your home increases.
Unlike a traditional home equity loan, a reverse mortgage guarantees you a certain amount. You never repay installments. The more you receive of the loan, the less equity remains in your home. The loan is not paid back until you no longer live in your home. You keep the title deeds of your home and never the lender.
As stated the loan is payable only when you longer reside in your home. This can be because your home is no longer your primary residence, you sell your home or you die.
You are guaranteed to receive all that is owing to you. Should the the equity in your home not be sufficient to cover the payments to you, the insurance on the loan guarantees that the lender will be paid and likewise, the borrower.
There are currently 3 programs to choose from; HECM, Home Keeper and proprietary. All 3 offer the same basic features and eligibility, though there are important differences between them. Let's take a look at the main points of each.
A credit check is carried out before the loan is granted. However, it isn't as stringent as when applying for other types of loan. Anyone you owe money to would usually be paid out of the total amount of the loan. Only, money owed to the government is a hindrance when applying.
A reverse mortgage does not affect your Social Security or Medicare eligibility. Is it considered a loan and not income.
Upon your death your house and all other assets go to your heirs. They will be required to repay the loan in one lump sum. They can do this how they like. They can chose to sell the home, get an ordinary mortgage on it, or raise the money any way they like.
HECM Reverse Mortgage
This is FHA (government) insured. Should there be insufficient funds to pay the amount owed, HUD will pay the lender the amount of the shortfall. This is guaranteed, as FHA collects an insurance premium from all borrowers to provide this coverage. The insurance premium is deducted from the payments issued to the borrower. The amount you can borrow depends on the equity in your home, location, current interest rates and your age. Usually, the more valuable your home and the older you are, the more you can borrow. However, there is a maximum amount that borrowed and it varies between $200,160 and $362,790. Over 90% of seniors choose this program.
There are 5 ways you can receive payments.
Tenure - this is the most popular method. Each month you receive payments for as long as you reside in your home.
Term - monthly payments over an agreed time scale.
Line Credit - you can withdraw funds in any amount you like until the line of credit is exhausted. Note: Texas does not permit this payment option.
Modified Tenure - a combination of monthly payments and line of credit until the line of credit is exhausted. Again, this option is not available in Texas.
Modified Term - a combination of monthly payments and line of credit over a specified number of months. But not in Texas.
Home Keeper Reverse Mortgage
This program is run by Fannie Mae. It most respects it offers the same as the HECM program however, they are some differences that may appeal to some.
Fannie Mae's benefits are best suited to individuals - couples usually fair better with another program. The interest rate is higher with a Fannie Mae over a HECM. HECM's line of credit grows while Fannie Mae's line of credit does not. You can borrow slightly more with a Home Keeper program; the current limit is $417,000.
Proprietary Reverse Mortgage
These programs are run by private companies and banks. They are often referred to as jumbo reverse mortgages because the amount that can be borrowed is unlimited. While these are more expensive programs for borrowers (initial set up fees, closing fees etc), they can release more equity from your home than either a HECM or Home Keeper reverse mortgage.
