The Home Equity Conversion Mortgage, or HECM, is the most common reverse mortgage and only one available in Minnesota. The HECM was first insured by FHA in 1989 for the purpose of providing a valuable financing alternative for senior homeowners to help them remain in their home and have access to funds by withdrawing a portion of their home equity.
A mortgage like any other mortgage where borrowers retain title and borrow against their home equity, the reverse mortgage offers special terms for seniors home owners 62 and older. One advantage for seniors is with the reverse mortgage there are no monthly payment requirements although borrowers are responsible for paying property taxes and insurance. While monthly payments aren’t required, one can make a payment or payments when and how much they choose.
The Principal Limit or maximum loan amount is determined by the home value or FHA Lending Limit, currently $636,150, the age of the youngest borrower (the older one is the more they can receive), the Expected Interest Rate, and the program chosen. Doing the reverse mortgage at a younger age may still be more beneficial than waiting until one is older.
To qualify borrowers must meet a Financial Assessment requirements demonstrating their ability and willingness to pay property taxes and insurance into the future. In some circumstances a Life Expectancy Set Aside (LESA) may be required to cover the property taxes and insurance.
With the Adjustable Rate option, the funds available can be received in a lump sum, monthly payments, a line of credit or a combination of these. The monthly payments can be structured as one needs or for life as long as the home is the primary residence. Funds in the line of credit grow so more funds can be available in the future. The line of credit growth rate is a feature that makes the reverse mortgage a tool for financial and long term care planning.
A fixed rate option is available however only the lump sum draw is available and the draw amount is limited to the 60% of the Principal Limit (an additional 10% is available in some circumstances).
The borrowers keep the title to the home and are responsible for property taxes, insurance, and maintaining the home. Unlike a conventional loan the interest accrues, increasing the balance with no mortgage payments due until the home is no longer the primary residence of the borrower(s) or if one has broken the terms of the loan, i.e. didn’t pay property taxes.
Because the closing costs are up-front, they are often perceived as high and often scare people away. However, the fees are comparable to the traditional closing costs of a conventional loan including an origination fee, appraisal, title fees, title insurance and recording fees. As a FHA insured loan, with the HECM borrowers also pay the FHA Mortgage Insurance Premium (MIP).
The repayment amount is the lesser of the loan balance or fair market value of the home. If there is remaining equity, it goes to the borrowers or their heirs. As a non-recourse loan there is no personal liability to the borrowers or their estate for repayment.
Generally the funds are tax-free but one should consult with their tax advisor for their specific situation.
One can have a trust, life estate, or receive Medicaid (Medical Assistance in Minnesota), Elderly Waiver or other public benefits.* In the case of a couple even if one of the borrowers goes into the nursing home or passes away, the other one can stay in the home and the loan isn’t due until both borrowers are no longer in the home as their primary residence. Not considered income, Social Security and Medicare are not affected. *Check with legal advisor for your situation.
Eligible non-borrowing spouses may be able to remain in the home if they meet certain qualifying attributes. Talk with your local originator and/or HUD approved reverse mortgage counselor for details.
With no limitations on how the funds can be used, through the years hundreds of thousands of seniors have benefitted from the reverse mortgage allowing them to stay in their home and have security, independence, dignity and control.
For further details on the reverse mortgage contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible. For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.
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Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.
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