Understanding HECM Reverse Mortgage Loans for Seniors
Reverse mortgages, sometimes referred to as a second mortgage, can be a good way for seniors to access extra funds with the risks of a traditional loan.
The Home Equity Conversion Mortgage is the Federal Housing Administration's reverse mortgage program. Like any reverse mortgage, the concept is to allow the borrower to withdrawal part of the equity from their home. As with any type of loan, there are advantages and disadvantages of an HECM home loan. In order to meet eligibility requirements, the applicant must be:
• 62 years of age or older
• Own their home
• Have a low mortgage balance
• Live in the home
• Receive information from an HECM counselor
Visit the Canada Mortgage and Housing Corporation's website to learn more.
How Much Can a Senior Borrow from an HECM Reverse Mortgage Loan?
Seniors are still eligible to apply for a reverse mortgage loan even if they did not have an FHA-insured mortgage to purchase their home. The amount a senior can borrow depends on factors such as:
• Interest rates
• Age of the youngest borrower
• Borrower's initial mortgage insurance premium choice*
*The borrower has a choice of either an HECM standard loan or an HECM saver loan.
The HECM FHA mortgage limit is $625,500, or the appraised value of the home if it is below this limit. The amount of the loan is the lesser of the two figures. Generally, the older a senior is and the lower the interest rate, the more that can be borrowed. The age of the youngest borrower is used for these calculations if there is more than one borrower.
Advantages of an HECM Reverse Mortgage Loan for Seniors
Before applying for an HECM reverse mortgage home loan, it is important to understand how such a loan works and the advantages and disadvantages of such a loan. The biggest advantage of an HECM reverse mortgage loan is that the borrower retains ownership of their home. Additional advantages of a reverse mortgage loan include:
• All current and future equity belongs to the homeowner
• Reverse mortgage rates are generally lower than traditional mortgage rates
• There is no longer any need to pay a monthly mortgage
• Credit scores and income are not considered during the qualification process
• Borrowers never pay back more than what their home is worth
• There is no risk of foreclosure as long as the borrower pays taxes and property insurance
Disadvantages of an HECM Reverse Mortgage Loan for Seniors
Remember, a second mortgage is still a loan. This means that the remainder of the loan is payable upon your death. Seniors who plan to move in the near future or don't believe they that they can make the monthly payments aren't good candidates for reverse mortgages. Additional disadvantages of a reverse mortgage include:
• Not being able to move until the loan is paid off
• Less equity is available for a senior's heirs
• Low mortgage payments may be replaced by higher monthly payments, depending on the total amount of the loan
Reverse mortgages can be a relatively safe way for seniors to obtain extra money without putting their home at risk as long as they are aware of the pros and cons of obtaining such a loan. A second mortgage has clear advantages over a traditional loan and significantly less risk. Legally, a senior borrower has three days to change their mind after closing has occurred. It is important to take the time to consider all the advantages and disadvantages of a reverse mortgage before proceeding with such a loan. The best kind of borrower is always an informed borrower.
About the Author:
Brentt Taylor was a contributing writer at MortgageLoan before becoming one of the editors of the site. He spends most of his time writing blog posts and editorials for finance websites.
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Would you consider a reverse mortgage loan as a way to help fund your retirement? Share your thoughts in the Comments section below.
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Talking About Your Parents' Finances
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Financing Your Retirement: Plan Ahead
