The Reverse Mortgage is also known as a home equity conversion mortgage or a reverse annuity mortgage (RAM). It is designed for homeowenrs who want to use their home equity to stay in their homes. The mortgage is structered so that the lender makes monthly payments to the homeowner. The proceeds continue for a specified period of time.
The lender gains a security interest in the value of the home. In fact, most of today’s reverse mortgages are insured by the FHA; through its Home Equity Conversion Mortgage (HECM) program, which was created and is regulated by HUD. In summary, the may types of reverse mortgages include: HECM for purchase, HECM standard, HECM choice, HECM fixed advantage, HECM refinance.
HECM makes borrowing equity from one’s home less expensive and safer for both the lender and the homeowner. HECMs are now the most common form of reverse mortgage
The benefits to those who want to obtain the HECM include:
- No monthly payments.
- No asset or income qualification or limits.
- The option of receiving a percentage of the value of the home equity in a lump sum, on a monthly basis, or as a revolving line of credit.
- No repayment of principal, interest, or fees until the surviving homeowner leaves.
- Continued payments as long as a surviving spouse remains in the home.
- No debt to the estate if the eventual sale does not repay the balance owed to the lender. The FHA will cover the remaining amount owed to the lender.
In addition, the Housing and Economic Recovery Act of 2008 (HERA) added new provisions to protect seniors who use the HECM program. These include:
- The ability to obtain an HECM loan in a single transaction (for seniors for whom the home is a primary residence).
- Counseling (to help homeowners understand that the equity payments could result in zero equity).
- A prohibition to lenders from requiring the borrower to buy insurance to protect the lender from a negative balance at the end of the loan program.
- Homeowners are still required to carry hazard and other homeowner insurance, and must make these payments or risk defaulting on the loan.
- A limit of origination fees to 2% of the maximum claim amount up to $200,000, and 1% of the maximum claim amount over $200,000.
- Lower-valued homes (less than $125,000) are limited to a $2,500 fee.
Note: Since HERA, cooperatives are now included in the program, as well.
As with other FHA-insured loans, the FHA collects an insurance premium from all HECM loans. The premium is 1.25% of the loan value. An initial mortgage insurance premium fee, if applicable, will be between 0.5% and 2.5%.
I offer a Free, no obligation mortgage consultation to see if a Reverse Mortgage is the best choice for you.