Home Equity Conversion Mortgages (“HECMs”), usually called reverse mortgages, allow seniors to convert part of their home’s equity into cash, into a line of credit or both. Therefore, HECMs provide cash for immediate needs and access to additional funds, when required.
The line of credit is one of the premiere features, because:
• Available (unused) funds grow tax free at the loan’s rate.
• Interest accrues only on funds withdrawn.
• Withdrawals and repayments can be made easily.
What’s Right About Reverse Mortgages – Finance Professor Jack Guttentag1 of the prestigious Wharton School recently referred to the HECM’s as one of the best engineered financial tools of our generation. He then added:
“The major challenge to the program is that millions of seniors, whose lives would be enriched by it, don’t take one, either because they don’t know about it, or increasingly because they have been frightened off by the media.”
Background & Multiple Uses – This FHA-insured program was designed specifically to help seniors stay in their homes and improve their quality of life.
HECMs are used to refinance existing mortgages (eliminate required payments), supplement retirement benefits (especially needed when a spouse dies), pay for medical costs and preferred in-home care, establish funds for emergencies or to help children and grandchildren, and as an alternative to withdrawing (and paying taxes on) capital gains or 401(k) funds. HECM’s are also increasingly being used to buy homes and to prevent foreclosures.
Qualifications & Requirements – The owners must both be 62 or older, and have sufficient equity (i.e. appraised value less any existing mortgage or liens). Since payments are not required, the borrowers’ income and credit scores are not considered.
The borrowers must occupy their home as their principle place of residence for at least 6 months/year, pay their property taxes and homeowner’s insurance and keep the home in good condition. Prior to applying, they must attend independent counseling at a HUD-approved agency.
HECM Loan & Guarantees – As opposed to a traditional mortgage, which decreases by required payments, a HECM does not require payments and increases over time. This increase may be offset, in whole or in part, by the home’s future appreciation.
HECM loans are federally-insured, which guarantees the proceeds will be available to the borrowers in accordance with the loan’s terms, and that neither the borrowers nor their heirs will ever owe more than the home’s value at the time it is sold.
For these guarantees, the borrowers are charged mortgage insurance premiums (“MIP”) – that being, 2 percent of the appraised value at closing, and then monthly, based on the annual rate of 1.25 percent. (This MIP should not be confused with “term-life mortgage insurance.”)
There is a HECM Saver program, which lowers the initial MIP from 2 percent to .01 percent, thereby decreasing closing costs. Though proceeds from this program are lower, this option does offer a fixed-interest rate option and should always be considered.
Advice & Counseling – The required HUD counseling explains how this program works and what options are available. However, with any major decision, it is recommended that borrowers consult with their financial planner, attorney and family members. It is also recommended that N.C. borrowers use banks approved by the Commissioner of Banks.
1Guttentag, Jack. “What’s Right about Reverse Mortgages.” Knowledge Wharton Today. Univ. of Pennsylvania. Oct. 2012.
Examples of Standard HECM LIBOR:
| Youngest Age of Borrower(s) | 62 years | 62 years | 80 years | 80 years |
| Appraised Value (2 examples) | $ 100,000 | $ 250,000 | $ 100,000 | $ 250,000 |
| Principle Limit Factor – based primarily on age |
61.9% | 61.9% | 71.8% | 71.8% |
| Principle Limit / Initial Loan Amt. | $ 61,900 | $ 154,750 | $ 71,800 | $ 179,500 |
| Less: | ||||
| Repayment of existing mortgage (if any) |
$ (40,000) | $(100,000) | $ (40,000) | $(100,000) |
| Mortgage Insurance Premium (2% Appraised Value) |
$ (2,000) | $ (5,000) | $ (2,000) | $ (5,000) |
| Other Closing Costs – estimates only* |
$ (2,000) | $ (2,500) | $ (2,000) | $ (2,500) |
| Proceeds from Loan – Cash &/or LOC |
$ 17,900 | $ 47,250 | $ 27,800 | $ 72,000 |
* Closing costs & 2% MIP are usually included in the loan, which eliminates / minimizes
out-of-pocket costs.