Although you may be close to retiring, having a large mortgage balance to pay off may be extending your working years. Worrying about paying off your mortgage in retirement without your traditional income can be extremely stressful. But the good news is that if you are 62 or older and have a sufficient amount of equity in your home, you may be eligible for a reverse mortgage.
The Home Equity Conversion Mortgage is reverse mortgage product made available through the U.S. Department of Housing and Urban Development (HUD). It is a Federal Housing Administration insured loan, meaning that it is insured by the federal government.
A HECM (home equity conversion mortgage) is for homeowners 62 and older who have either not paid off their mortgage or have a significant amount of home equity, and are currently living in the home as their primary residence. There must be enough equity to pay off an existing mortgage with a reverse mortgage.
If you are eligible for a HECM, you will have the option to tap into a portion of your home’s equity and will no longer have to make monthly mortgage payments, as long as the home continues to be your primary residence and you maintain property charges including property taxes, fees, hazard insurance and maintain the home.
Aside from living in the home and being at least 62 years old, let’s review borrower requirements:
- Must not be delinquent on any federal debt;
- Must have the financial resources, and be able to verify them, to continue to keep up with ongoing property charges such as property taxes, insurance and homeowners association fees;
- Must complete a reverse mortgage counseling session provided by a HUD-approved HECM counselor;
- Must verify income, assets, monthly living expenses and credit history;
- If there is an existing mortgage, must have enough equity to pay off with reverse mortgage;
- Must be primary residence;
- Must have a history of timely payments of real estate taxes, hazard and flood insurance premiums to qualify.
In addition, there are certain qualifications the home must meet to qualify for a reverse mortgage.
- Home must be a single family home or two-to four-unit home with one unit occupied by the borrower;
- Property can be a HUD-approved condominium property;
- Can be a manufactured home if it meets FHA requirements;
- The home must meet FHA minimum property standards and flood requirements.
When it comes to the amount you can receive with a HECM, there are many factors that come into play. These include the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, the home’s appraised value and the initial mortgage insurance premium.
A combination of those factors will determine how much you can borrow, otherwise known as the maximum claim amount. You will have a decision as to how you would like to receive the funds. There are combinations of payment plans, but you can choose from one of the following or can combine the payment plans as needed, which include:
Lump sum
Tenure payments: equal monthly payments as long as at least one borrower continues to live in the home as a principal residence;
Term payments: equal monthly payments for a fixed period of months selected;
Line of credit: payments or installments that are not scheduled and in any amount that you choose until the line of credit is exhausted.
One particular feature of the HECM line of credit option is that if the borrower leaves the funds untouched, the amount of funds accessible will increase over time. The available credit rises every year by approximately the mortgage interest rate.
A reverse mortgage is typically paid back with the sale of the home, but if the borrower’s heirs would like to keep the home once the borrower passes away, they can choose to pay off the loan balance using other funds, and keep the home.
Most reverse mortgage loans are considered “non-recourse loans.” This means that you can never owe more than the value of your home at the time you or your heirs sell your home to repay your reverse mortgage. If your loan is a HECM, the reverse mortgage debt may be satisfied by paying the lesser of the mortgage balance or 95% of the current appraised value of the home.
If you are interested in learning more about how to qualify for a reverse mortgage, contact us for more information.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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