Understanding Reverse Mortgages - Home Equity Conversion Mortgage
How do you chose the reverse mortgage that's right for you? Understanding reverse mortgages is only half the battle...how do you decide which type of reverse mortgage is best for you?
Reverse mortgages are a way for seniors to access the money they have built up as equity in their homes over the years. There are several types of reverse mortgages on the market today. One of those is the Home Equity Conversion Mortgage (HECM) from Fannie Mae which offers homeowners age 62 on older the ability to tap into their home equity and receive loan proceeds in a lump sum or in monthly payments to help supplement their income. This type of reverse mortgage loan does not need to be repaid as long as your home is your principal residence and you stay current with your property taxes and home owners insurance.
To be eligible for this reverse mortgage:
You must be at least 62
Any co-borrowers must also be at least 62
You must own your home free and clear or have a relatively low balance on your mortgage. The balance must be paid off in order to receive the mortgage but, you can use the cash you receive from your HECM to pay it off.
You must receive reverse mortgage counseling from a HUD approved counseling agency before your application is processed. Once you complete your counseling, you will receive a certificate of HECM counseling that will be good for 180 cays.
The property can be no more than a four-unit dwelling or a unit in a condominium or planned development project in a FHA approved development.
An important factor when understanding reverse mortgages is that HUD uses a formula to determine the amount of money that you can borrow. There are 3 factors that are taken into account. The first is the age of the youngest borrower because of the amount of monthly advances that will be made. Secondly, is the maximum claim amount, which is either the appraisal amount of your home or the maximum loan amount that can be insured by the FHA for homes in your area. And lastly, is the expected average mortgage interest rate because the lower the interest rate, the lower the cost of the loan and that means you will have more borrowing power.
How do you get your money?You can choose from 6 different ways to be paid:
Monthly, which would be for as long as you live in your home.
Term, would be for a specific amount of time
You can get it as a line of credit
Modified term, which is a combination of Term and a line of credit
Modified Monthly, which is a combination of monthly as well as a line of credit.
Or, you can get your money in one lump sum.
Whichever plan you choose, you do not have to repay the loan as long as your home remains you primary residence.
One of the great things about this type of reverse mortgage is that you have the ability to change your payment type at any time and as many times as you wish so if you are on the monthly plan and you need to make some costly repairs to your home, you can add the line of credit option to your plan without having to pay a new loan origination fee. The only fee you would have to pay would be an administrative charge of no more than $20 each time you request a change.
Payments made to you with an HECM will not affect your Social Security or Medicare eligibility or benefits but if you receive SSI or Medicaid, your payments may be affected since both of these are based on need. You will need to check with your local Area Agency on Aging office to make sure it will not affect these or other programs that you receive benefits from.
Understanding reverse mortgages means that you understand that before you take out an HECM or any other reverse mortgage, you must understand how the loan is going to be repaid. With an HECM reverse mortgage loan, the balance of the loan is due when you no longer occupy your home. It is due in one payment which can be made from the sale of your home.
For more information check out The Reverse Mortgage Book: Everything You Need to Know Explained Simply
Return To Retirement Planning Articles from Understanding Reverse Mortgages - HECM
Return To Americas Best Places To Retire Homepage From Understanding Reverse Mortgages - HECM