Reverse Mortgage FAQ # 1: What is a reverse mortgage?
Otherwise known as a home equity conversion mortgage, or HECM, this unique product allows seniors to access equity in the form of cash payments or a line of credit, while continuing to remain in the home as their primary residence. Unlike the repayment terms of a traditional loan, the borrower does not make monthly payments at all, unless they no longer occupy the home or they become non-compliant with the required maintenance, tax, or insurance obligations.
Reverse Mortgage FAQ # 2: How does a homeowner qualify?
Eligibility depends on whether the property owner meets certain age and ownership requirements. Credit and income are not a factor. For an HECM insured by the Federal Housing Administration, a senior must be at least 62 years of age and have a sufficient amount of equity available, along with disposable funds that can be accessed to pay property costs such as insurance, taxes, and maintenance. If a lender determines that a senior does not have the financial resources to meet these customary expenses, they may require that part of the proceeds be set aside to cover such costs. There are also certain FHA counseling requirements that must be fulfilled in order to meet HECM guidelines. These sessions are typically free or low cost to the consumer while they are considering applying for a reverse mortgage.
Reverse Mortgage FAQ # 3: What are the options for transferring funds to the homeowner?
For adjustable interest rate products:
– Line of Credit: a set credit limit that can be drawn against when the homeowner chooses, and can also be accessed with prearranged installments
– Fixed Term: monthly payments for a fixed period of time
– Tenure: monthly payments for the duration of the senior's participation in the program
The above fixed term and tenure plans can be combined with a line of credit for a modified version of each option. For seniors who depend on Medicaid benefits for their healthcare, a HECM specialist or an elder law attorney should be consulted to determine which plan best suits their needs and allows for continued Medicaid eligibility.
If Medicaid eligibility is not a consideration, a lump-sum disbursement at a fixed interest rate can be transferred to the senior at the closing of the reverse mortgage.
Reverse Mortgage FAQ # 4: How does a home equity loan differ from a HECM?
A home equity line of credit, or HELOC, requires the borrower to make monthly payments toward principal and interest. For an HECM, the bank actually pays the homeowner. Since seniors are required to remain in their home as their primary residence, they are likewise responsible for keeping current on real estate taxes, flood and hazard insurance, and utilities payments for the duration of the agreement.
Reverse Mortgage FAQ # 5. Will my heirs be responsible for paying off my balance in the event of my death?
As a non-recourse loan, the creditor can only consider the property for repayment. Lenders cannot attach other family assets in the event that the senior's loan balance exceeds the property value. Neither the borrower nor the heirs can be held responsible for more than that value, even if the remaining balance exceeds the amount at the time of repayment.