FHA Reverse Mortgages for Seniors (HECM)
Pensions are becoming less common, people are living longer, and medical costs continue to rise. More and more, responsibility for retirement income and planning falls to the individual. One way retirees can supplement their income is through a Home Equity Conversion Mortgage (HECM). Like a traditional reverse mortgage, a Home Equity Conversion Mortgage works by trading equity in your home for cash now.
However, a traditional reverse mortgage can be risky. If you exhaust all of the home equity you risk going into debt, or worse, losing your home. HECM reverse mortgages are a safer, federally insured alternative.
What Is an FHA Reverse Mortgage?
In 1989, the Federal Housing Administration (FHA) created the Home Equity Conversion Mortgage (HECM) program. HECM is a safer, federally insured version of the traditional reverse mortgage.
A reverse mortgage allows seniors over the age of 62 to make use of the equity in their home to cover expenses like home repairs or unexpected medical bills. Traditionally, reverse mortgages have been used as last resort to cover expenses because you risk losing your home.
Risks Of a Reverse Mortgage
HECM reverse mortgages are safer than traditional reverse mortgages. With an HECM loan, you pay a monthly insurance premium to the FHA out of the money you get from your reverse mortgage payments. In exchange, the FHA guarantees:
- You never have to repay more than your home is worth, and
- You will never be forced to move out of your while home you (or spouse) still live there, even if you use up all the equity in your home.
With an FHA reverse mortgage, as long as you can afford regular costs of upkeep, property taxes, utilities, and homeowner's insurance, you can continue to live in your home until you and your spouse (even a non-borrower spouse) move to another home or pass away. Because of these protections, HECM reverse mortgages are much safer for homeowners.
But there is still a downside.
When your home is sold, the cash, interest, and finance charges must be repaid. You will have less money to buy another home or pass along to your estate. However, because HECM is a non-recourse loan, you can never end up owning more than your home is worth. If you are fortunate, your home will continue to appreciate. This increase in value can offset the cost of the reverse mortgage.
HECM Reverse Mortgage Requirements
In order to qualify for an HECM, the homeowner must be 62 or older and the home must be paid off or nearly paid off. The property must be a primary residence. Two- to four-unit properties are eligible as long as the homeowner occupies one of the units. In addition, the homeowner must show income sufficient to pay expenses like utilities, insurance, property taxes, and HOA fees.
How Much Does an FHA Reverse Mortgage Cost?
A reverse mortgage costs nothing up-front. But as with any mortgage, there are costs associated like origination fees, title costs, servicing fees, and other charges. In addition, HECMs require FHA mortgage insurance premiums. The good news is that these costs can be factored into the cost of the loan, saving the homeowner from having to pay them up front. Your cash payments will be slightly reduced to cover the mortgage costs and insurance premium.
How Are Funds Disbursed?
Homeowners can receive funds in different ways according to the terms of the HECM. For those with adjustable rate mortgages, there are a number of options.
- Tenure: Consistent monthly payments as long as you or your spouse live in the home as your primary residence.
- Modified Tenure: Combines line of credit with consistent monthly payments as long as the home is your primary residence.
- Term: Borrowers will receive consistent monthly payments for a fixed number of months.
- Modified Term: Combines line of credit with consistent monthly payments for a fixed number of months.
- Line of Credit: Borrowers may draw payments as needed over time and in an amount of their choice as long as there are funds available in the line of credit.
- Fixed Interest Rate mortgages: Single disbursement lump sum payment.
How Much Money Is Available Through an HECM Reverse Mortgage?
The amount varies depending on a number of factors, including:
- The age of the youngest homeowner
- The interest rate at the time of the mortgage application
- The appraised value of the home or the HECM FHA mortgage limit of $625,500, whichever is less.
Cons To An HECM?
HECM seems too good to be true.
One of the primary cautions to be aware of with reverse mortgages is that you will still have to pay a number of costs associated with homeownership, including property taxes, insurance, HOA fees, utilities, upkeep, and more. Should the homeowner be unable to pay these and have to sell the home, all of the proceeds could be needed to repay the reverse mortgage, potentially leaving the homeowner in worse financial condition than before.
In addition, should the homeowner become ill or disabled and be forced to live in an assisted living facility or nursing home for more than one year, the home will no longer be considered a primary residence. At that time, it will have to be sold and the proceeds used to repay the reverse mortgage.
Finally, while homeowners become eligible at age 62 for a reverse mortgage, they may have to fund 20-30 years or more of retirement. If you use all the income from an HECM loan, you risk being unable to continue to fund your retirement, having exhausted all of the equity in the home. For this reason, a reverse mortgage should never be the primary retirement funding plan. It should be considered, if at all, as a supplement to an existing retirement income.
If you’re looking for help with medical or retirement expenses, or if you have acquired a great deal of equity in your home over the years and would like to put it to work to supplement your retirement savings, an HECM reverse mortgage may help create consistent, reliable income or a one-time cash infusion. Contact an FHA-approved lender or find an HECM counselor to learn more or to get started.