About Reverse Mortgages is a leading free informational website for seniors who want free and unbiased info on HECM (home equity conversion mortgage) or reverse mortgages.
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Many retirees worry about having enough money to fund their full retirement. Pensions are becoming rare; Social Security doesn’t provide enough to cover all living expenses, and retirement savings can be eaten by market losses and emergency expenses.
Retirees who may lack the cash needed to live comfortably in retirement often have a considerable amount of money tied up in their homes, especially those who have paid off their mortgages. Unfortunately, a property isn’t a liquid asset. In the past, retirees who needed the cash value of their homes had to sell or take out a home equity loan.
In recent years, another option has been provided for retirees who are property-rich but cash-poor: reverse mortgages.
What is the definition of HECM?
Home equity conversion mortgage or as most seniors and consumers know it by the name ‘reverse mortgage.’
What is a reverse mortgage?
A reverse mortgage is a type of home equity conversion mortgage/loan that allows certain homeowners to convert their home equity into cash. It is different from a traditional home equity loan in that the homeowner does not make monthly payments to repay the loan. Instead, a reverse mortgage loan is repaid, with interest, when the property is sold, refinanced, or when/if the homeowner moves out of the house. Reverse mortgages are set up so that you never own more than the home’s value at the time the loan is repaid through the FHA insurance policy premium paid for by the consumer when the loan is first taken.
A reverse mortgage places a lien on the property. During this time, the homeowner maintains title and property ownership, and thus responsibility for maintenance, taxes, insurance, utilities, and other expenses.
The amount you can borrow depends on your age, your home’s value, and the loan interest rate along with fees charged by the lender. In general, the older you are, the more you can borrow. As the home appreciates in value and the borrower grows older, they may qualify for more funds, and the HECM reverse mortgage may be refinanced to allow the homeowner to receive even more money from this increased equity.
Who is eligible?
Reverse mortgages are available to homeowners age 62 and over. The property being loaned against must be the borrower’s primary residence. It’s not required to own your home free and clear before applying for a reverse mortgage, but any mortgage balance you have should be a small percentage of the home’s value. That’s because you cannot maintain a conventional mortgage and a reverse mortgage simultaneously. You are allowed to use some of the proceeds of the reverse mortgage to pay the full balance on your conventional mortgage.
The property must meet FHA standards to be eligible. Reverse mortgages are typically limited to single-family homes. However, owners of properties with two to four living units can also qualify as long as the borrower also lives on the property. Some condominiums and manufactured homes can also qualify.
Funds from a reverse mortgage are typically non-taxable, and they do not impact a person’s Social Security or Medicare benefits.
For tax purposes, the interest that accrues on a reverse mortgage is not deductible until it is paid, which occurs when the full loan is repaid. The deduction you can take for interest paid on a reverse mortgage loan is also generally subject to the limit on home equity debt.
Three options for reverse mortgages
Reverse mortgages come in three types, each serving different needs.
The most common reverse mortgages are Home Equity Conversion Mortgages (HECMs). These are federally insured loans backed by the U.S. Department of Housing and Urban Development (HUD) and make up more than 90% of the current reverse mortgage market. The proceeds can be used for any reason, such as covering monthly expenses, but there is a cap on how much you can borrow. So those with high-value homes may not be able to borrow the full value of their property.
Single-purpose reverse mortgages are loans available to homeowners to address a single expense, such as home repairs or property taxes. The lender restricts how the bank can use the borrowed funds, and typically will only loan a small amount of the property’s equity. This type of reverse mortgage is offered by government and non-profit agencies and are usually available to low and moderate-income homeowners.
Proprietary reverse mortgages are offered by private lenders and are not federally insured. This type of loan is less restrictive than HECMs and single-purpose loans and are rare in today’s market. Jumbo reverse mortgages fall into this category, and only a few select lenders participate in this market. Click Quote Save can help you compare and find these alternative reverse mortgages free of charge, we have built a database of the very best offerings and know how to navigate this market.
Like with traditional mortgages, there are fees and closing costs associated with reverse mortgages. Borrowers can pay these expenses up front or roll them into the loan. Typical charges include an origination fee, appraisal fee, and service fee. If the loan is federally insured, there will also be a premium payment for mortgage insurance, which protects the lender from a borrower defaulting on the loan.
When the home is sold or no longer used as a primary residence, the cash, interest, and other finance charges must be repaid by the borrowers of the loan. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. This does NOT Belong to the bank; this is a major misconception senior consumers and the media have. No debt is passed along to the estate or heirs either.