The Federal Housing Administration (FHA) offers the Home Equity Conversion Mortgage (HECM). This allows you to start taking some of that equity back out of your house. Because it is backed by the government, it is a safe program that can give senior citizens some additional financial stability. A lot of senior citizens supplement their income from Social Security with it, and others use the funds to pay for unanticipated medical costs, make improvements to their homes, as well as other uses. The National Council on Aging can give you additional information about how reverse mortgages work, either through a booklet you can download from their website or by dialing (800) 510-0301.
If you are worried about your ongoing financial situation, learning more about the way reverse mortgages work is wise. For more information about reverse mortgages visit out the American Advisors Group facebook page.
1. How do reverse mortgages work?
Before further venturing into this topic, you may want to check out this blog post from Capstone Direct to learn about the advantages and disadvantages of a reverse mortgage. They are a separate type of home loan that allows you to change some of your equity into cash. You receive some of the equity that you have spent accumulating over the years. However, it is different because you do not have to pay the money back until you either fail to satisfy the conditions of the mortgage or no longer live in that house as your primary residence. If you have the funds on hand to cover the gap between the proceeds of a loan and the selling price with closing costs, you can also use one of these loans to buy a house. You also could use a specialist loan to aid you with the cost of your home; for example, if you were a doctor, you could use a vetted list of 22 best physician mortgage loans to help cover the purchase of your home.
2. How do you qualify for the HECM program for reverse mortgages?
The FHA mandates that program participants already own a home and be at least 62 years old. You either have to own your house free and clear or have an outstanding balance on your mortgage that proceeds from a reverse mortgage could satisfy at closing. You also have to have the money to pay for such ongoing costs as insurance and property taxes, and you have to reside in the home. You also have to go through an informational session with an HECM counselor before you secure the loan. HECM counselors are available online or at (800) 569-4287.
3. Can you qualify for the HECM program even if you did not use FHA mortgage insurance to purchase your current home?
Yes. The process does not consider whether you bought your home using an FHA mortgage or not.
4. What types of dwellings qualify?
To qualify for the HECM program, your house can either be a single family unit or a building with as many as four units, so long as you occupy one of them. Manufactured homes and condominiums that receive HUD approval and also satisfy FHA requirements also are eligible.
5. How does a reverse mortgage differ from a home equity loan?
When you open a home equity loan, or a second mortgage, you have to make payments each month on the interest and principal, on the lump payment you received when you took out the loan. With an AAG reverse mortgage, you get a monthly payment instead of one lump payment, but there is nothing to pay back. You do have to keep up all insurance premiums, utilities and property taxes.
6. What impact will a reverse mortgage have on your estate?
When you sell the home or move out of it, you have to repay the money you have received, along with any interest and other finance fees. Any proceeds left over go to your estate or your spouse, which means that if you have any equity left, you can transfer it to your heirs. No debt goes to the heirs or estate.
7. How much equity can you take out of the house?
This amount varies, because it depends on certain conditions. The prevailing interest rate at the time of the loans, the first mortgage insurance premium, the age of the youngest person on the note, and the lesser of $625,000 or the appraised value of your home all contribute to the available equity. Obviously, if you still have a balance on your mortgage, that will affect your net proceeds as well.
8. Is an estate planner the best source for a lender for reverse mortgages?
The FHA recommends against using a service that wants a fee for giving you a referral to a lender with FHA approval. You can search the HUD website on your own to find a lender with that approval or contact an HECM counselor without paying anything. To find a local HECM counselor, call (800) 569-4287 or search online.
9. How do you receive your money?
There are several payment plans, and the one you choose depends on your own preferences and the requirements of your loan.
Line of credit — these payments are either not scheduled or in a set of installments. You receive them as you choose until the credit line is reached.
Term — You get equal payments each month for a set number of months.
Tenure — You get equal payments each month as long as one borrower is still alive and lives in the property as his or her primary residence.
Modified Term — This combines the line of credit with monthly payments for a set period of time.
Modified Tenure — This combines the line of credit with monthly payments until you stop living in the house.
Lump sum — You get one check at closing.
10. What if you change your mind after closing and want to cancel the loan?
Federal law gives you three calendar days to cancel your loan. The term for this is the “three-day right of rescission.” At closing, you should receive an explanation of this process, so ask for instructions if you think you might do this. Different lenders have different processes for canceling a loan, so ask for the contact information for the proper parties and for the steps of the process that the lender has in place. In the case of a purchase, the right of rescission often does not apply, so make sure that you get clarification before you sign the papers at closing.