No financial product is as misunderstood as reverse mortgages. The reason for the confusion is because the products are so flexible that they provide solutions for virtually any senior financial situation. Here is a breakdown of the two main types of reverse mortgages: Home Equity Conversion Mortgages and Proprietary Reverse Mortgages.
Home Equity Conversion Mortgage
- Pronounced HEKUM, a HECM is an acronym for a Home Equity Conversion Mortgage.
- Created and regulated by the U.S. Department of Housing and Urban Development (HUD), HECMs are not government loans.
- A HECM is issued by a mortgage lender and insured by the Federal Housing Administration (FHA), which is part of HUD.
- With an HECM, the borrower is charged an insurance fee of 1.25% of the loan balance each year, which is added to their loan payment.
- Insurance fees protect lenders if the borrower is not able to make a payment or if the value of the home (upon selling) fails to cover the balance of the loan.
- Most reverse mortgages offered in the U.S. are HECMs.
- The maximum lending limit is $636,150.
Typical HECM Repayment Options
Line of Credit
Most reverse mortgage borrowers establish line of credit which they can access when funds are needed. In this case, borrowers can access funds by submitting a written request to the loan servicing company. An important feature about this line of credit is that the unused portion grows over time. The borrower does not earn interest, as he or she would with a checking account. Rather, with every year that passes, the lenders take into consideration that the borrower is one year older and that their home has likely appreciated in value.
With this option, borrowers make fixed monthly payments for a specified amount of time. If, for example, the borrower is 65 and wishes to defer claiming Social Security until he or she turns 70 (since deferred claims result in the maximum payout benefit), this borrower can establish term payments for five years. In such a case, the amount received each month would not change, even if the home decreases in value.
Providing borrowers with fixed monthly payments for as long as the person lives in the home, this option is great for people who keep their home as a primary residence. Even if the loan balance exceeds the value of the home, the borrower would continue to receive the same monthly payment. The payments would cease only after the borrower passes away or permanently leaves the home.
Modified Term/Line of Credit
The borrower establishes a line of credit and receives fixed monthly payments for a specified amount of time, under this repayment structure.
Modified Tenure/Line of Credit
Under this option, the borrower is given a line of credit and would receive fixed monthly payments as he or she lives in the home.
Single Disbursement Lump Sum
This is a great way for homeowners to preserve equity. With a single disbursement, the borrower can take fewer funds than he or she may qualify for. For example, if the borrower is eligible for a $200,000 loan, but just needs access to $10,000 to replace the carpet, he or she can opt to take the lesser amount. A one-time lump sum payment is made to the borrower. The drawback to this structure is that additional funds are not available later, so the borrower would have to refinance or apply for another reverse mortgage, which would require additional closing costs and potential application hassles.
If the borrower does not wish to remain in the home for decades, he or she could use a reverse mortgage to downsize and purchase a new home. The advantage of using HECM for purchase is that the new home could be purchased outright, using funds from the sale of the old home, private savings, gift money or any other sources of income. These are then combined with the reverse mortgage proceeds. This option would leave borrowers without the hassle of monthly mortgage payments.
Proprietary Reverse Mortgage
Unlike an HECM, proprietary reverse mortgages are privately insured by the mortgage companies which offer them. Thus, they are not subject to HECM regulations. Nevertheless, as a standard best practice, most companies that offer proprietary reverse mortgages follow many of the same consumer protections found in HECM programs, including mandatory third-party counseling.
Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages, because they are taken on higher-value homes. The maximum loan limit on a HECM Mortgage is $636,150. This is important in Southern California, where Reverse Mortgage Certified is based, since homeowners’ properties are often valued more than one million dollars.
If you have questions about how much reverse mortgage capital you might qualify for, contact Manny LaFosse, your certified reverse mortgage consultant. Residents of Los Angeles County and North Orange County should look to the experts at Reverse Mortgage Certified for great rates and information about the reverse mortgage loans as well as several other available financial options.