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If you are a senior homeowner, you’ve likely heard about HECM reverse mortgages. You may have even considered applying for one as a way to turn your home equity into monthly payments to help with your living expenses. There are some positive aspects that can benefit reverse mortgage borrowers. However, there are some downsides attached to many reverse mortgage programs that you will want to understand before committing to this type of loan.
Government-Insured HECM Reverse Mortgage
There are also different types of reverse mortgage loans that may be available to you. One you will definitely want to ask about is the HECM reverse mortgage. “HECM” stands for Home Equity Conversion Mortgage. This is the only reverse mortgage program insured by the U.S. Federal Government—more specifically, the Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD). It is only available through FHA-approved mortgage lenders and mortgage brokers.
Benefits of HECM Reverse Mortgages
An HECM reverse mortgage allows you to withdraw a portion of your home equity. Like standard reverse mortgages, you would receive the loan in the form of monthly payments. They are called “reverse mortgages” because the bank is paying you each month as you borrow against your home equity. It’s essentially the opposite of a home equity loan, which would have you borrowing a lump sum from the lender and then making payments each month. As a senior homeowner with strong home equity, you will want to explore all of these options including reverse mortgage, home equity loans and home equity lines of credit (HELOCs).
If a reverse mortgage is the best solution for you, then HECM reverse mortgages can provide you additional peace of mind. Mortgage lenders are taking more risk when issuing any type of loan—especially a reverse mortgage—that isn’t insured by the government. An HECM can offer you more benefits as the borrower because the lender is assuming less risk. This could mean easier qualifying standards, a lower mortgage rate and higher monthly payments.
How Much Can I Withdraw with an HECM Reverse Mortgage?
The amount that you can withdraw will depend on several factors:
Age—The age of the youngest borrower or eligible non-borrowing spouse will factor into your qualified HECM reverse mortgage borrowing limit.
Interest Rate—Your mortgage interest rate will be set based on your financial qualification standards, and the mortgage rate itself will affect how much you are able to withdraw.
Home Value—The withdrawal amount will also be affected by the lesser of the appraised value of the HECM FHA mortgage limit or the sales price of the property.
Pros and Cons of HECM Reverse Mortgages
The best part of an HECM reverse mortgage is that you are withdrawing money from your home equity, and you are not making any payments on the loan. You are basically just borrowing from yourself. Repayment is only required when the borrower passes away or when the house is sold. In other words, if you eventually sell the property you are using to fund your reverse mortgage, any money you withdrew would have to be paid back (with interest) upon completion of the sale.
The primary downside of a reverse mortgage is what happens to the property and the loan if you do eventually pass away. Your heirs would be responsible for paying back the loan, which would generally mean selling the house. You may want to reconsider a reverse mortgage if you intend to pass on a family home to your beneficiaries without these financial strings attached. At the very least, this may be a decision you want to talk about with your family before withdrawing money through a reverse mortgage.
Is an HECM Reverse Mortgage Right for Me?
Reverse mortgages can be great for certain senior homeowners who need the money for living expenses. Most retirees are living on fixed incomes, but costs of living are always rising. Plus, there are unpredictable expenses like medical bills, which aren’t always easy to plan for when saving for retirement. If a reverse mortgage is a good solution for you, then you will want to seek out an FHA-approved lender and ask about HECM reverse mortgages. This government-backed program offers more benefits and flexibility than a reverse mortgage you might get through a less-trusted lending source.
To learn more about HECM reverse mortgages and other home equity loan options that may be better for you, contact Moreira Team | MortgageRight today. We are an FHA-approved mortgage broker and our team can help you make the right borrowing decisions.