What Exactly is a Reverse Mortgage or an HECM?
More seniors than ever face challenges related to retirement, estate planning, and living well in their later years. Clients sometimes bring up the question of reverse mortgages. It’s not the perfect solution for every person, but it’s a legitimate option.
Most of us understand conventional mortgages, as they are pretty straightforward. Reverse Mortgages are another story. What are they, and how do they work? We talked with Dennis Cooper, Senior Vice President HECM Division at the Federal Savings Bank. He offered some details and removed some of the mystery.
Established by Congress in 1988, a Home Equity Conversion Mortgage (HECM) is a way for aging individuals to convert a portion of their home’s equity into tax-free money.
While there are “proprietary” reverse mortgages available, they are rare. They do not offer the consumer protections of an HECM. To quote the HUD website, “The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.”
While due consideration must be given to the fees and risks, reverse mortgages are a legitimate choice for many seniors who want to free up cash or supplement their retirement income. The money can be used for services related to aging in place, modifying a home to accommodate physical challenges, or other needs that arise. A common example is “right-sizing” to a smaller home, or moving closer to family.
The homeowner retains title to the home, a fact that often surprises consumers. When the owner passes on, or no longer uses the home as their primary residence, the house does not have to be sold. If the family wants to keep the home they may, by using other options to repay the HECM. In the meantime, no mortgage payments are made. The homeowner is, however, responsible to pay taxes and insurance in order to avoid default.
When the Home is Sold
In most cases, the value of a home increases over time. The eventual sale price typically exceeds the HECM payoff amount. That positive difference goes to the estate, and is then paid to the heirs.
In some cases, however, homes do not appreciate as expected. When the payoff amount exceeds the home’s sale price, the family need not worry. Because the loan is federally insured, the difference is covered. The payoff obligation will never exceed the value of the home.
Why are Reverse Mortgages Becoming Popular?
The last few decades have brought important changes related to lifestyle and longevity. Instead of needing to sustain themselves for an average of three years after retirement, seniors now expect to live at least a decade longer.
Pensions aren’t what they used to be, retirement savings only go so far, and Social Security isn’t always enough. When medical expenses pile up, new solutions are needed. For some, a reverse mortgage is a great way to supplement retirement income.
How Does an HECM Work? How Much Money Can You Get?
Obtaining a Home Equity Conversion Mortgage is fairly simple. An appraisal is conducted for a $500 fee. Borrowers participate in a counseling session, which also might have a fee. The conversation is not psychological, but informative in nature. The idea is to be certain that people understand all the details and have the ability to make tax and insurance payments.
Having a non-recourse loan means that neither you nor your heirs will ever owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.
The amount of money you can get depends on three things; the age of the youngest borrower, the value of the property, and the interest rate associated with the program. More money is available for older borrowers, higher home values, and lower interest rates.
Proceeds are received in one of several ways; Lump sum, a line of credit, monthly payments, Term payments, or a combination of the four.
Requirements have changed on occasion, and consumer protections have been added. Here are a few of the rules worth mentioning:
- The HECM must be a first mortgage. Other loans against the home must first be paid off.
- Age minimums apply. At least one of the applicants must be 62 years or older.
- Only certain dwellings qualify. Single family homes, 2-4 unit dwellings, and FHA approved condos are eligible.
- Move-in date. This rarely poses a problem, but you must take occupancy within 60 days of closing.
Questions, Concerns and Cautions
Because they differ from conventional mortgages, people have questions and concerns that need to be addressed. Some concerns are legitimate, and must be carefully considered.
Can the bank take my house for lack of payment? There are no mortgage payments. Insurance and property tax, however, must be paid. Failure to make those payments can result in foreclosure.
We won’t be able to leave the house to our children. This is true. In most cases, however, it’s not a real concern. At this stage, children are grown, and have their own homes. They are more interested in the transfer of wealth than returning to their childhood residence.
What if we end up “under water” with the value of our home? Part of the beauty of a Home Equity Conversion Mortgage is the fact that no one loses, no matter what happens to valuations. The insurance integrated into the loan covers the difference between any outstanding balance and the value of the home. As long as tax and insurance payments are made, there is no cause for concern.
Caution is in order. Although a counseling session is required in order to obtain a HECM, consumers are wise to be sure they’re making proper use of the program. As with any major decision, other options should be examined. Consider your real needs, your spending habits and refrain from taking a loan for frivolous uses.
In many cases, resources from a reverse mortgage should be reserved for critical needs. Examples are medical bills that can’t be otherwise paid, modifying your home to allow you to stay there, and expenses related to home health services. While considering your options, you will also benefit from talking with a tax professional to learn which home modifications and medical expenses are tax deductible.
Advance Planning is Always Helpful
Issues related to aging, health, financial planning, and estate planning easily get complicated. You can, however, accomplish your personal and family goals by consulting with a team of trusted professionals who know how to get all the pieces working together.
If you want help getting started, call Quinn Estate & Elder Law at (636) 394-7242.