Reverse Mortgages: The Story of HECMs
Many older homeowners are turning to “reverse” mortgages, which allow them to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. The money can be used to pay for health care expenses, pay for home improvements, pay off a current mortgage, or supplement retirement income.
Under the terms of a traditional mortgage, you make monthly payments to the lender. But in a reverse mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home; the loan must be repaid when you die, sell your home, or the home is no longer your principal residence. Reverse mortgages can help homeowners in tight financial situations stay in their homes and still meet their financial obligations.
One popular type of reverse mortgage is a Home Equity Conversion Mortgage (HECM). HECMs are federally insured reverse mortgages, and are backed by the U. S. Department of Housing and Urban Development (HUD). The up-front costs of HECMs can be high, so they are generally most expensive if you stay in your home for just a short time. They are widely available, have no income requirements, and can be used for any purpose.
Before applying for an HECM, you must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. Counselors will tell you about government programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area.
How much money you can borrow with an HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
The HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash advances for a specific period, or you can choose a line of credit, which allows you to draw on the cash at any time in amounts that you choose. You also can get a combination of monthly payments and a line of credit.
If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more informed questions, which could lead to a better deal.
Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.
No matter why you decide to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.
By: Present Value