Understanding Reverse Mortgages – The Equity Conversion Mortgage

Understanding Reverse Mortgages – The Equity Conversion Mortgage

Reverse mortgages are a way for seniors to access the money they have built up as equity in their homes over the years. There are several types of reverse mortgages on the market today. One of those is the Home Equity Conversion Mortgage (HECM) from Fannie Mae which offers homeowners age 62 on older the ability to tap into their home equity and receive loan proceeds in a lump sum or in monthly payments to help supplement their income. This type of loan does not need to be repaid as long as your home is your principal residence and you stay current with your property taxes and home owners insurance. 
 
To be eligible:
* You must be at least 62
* Any co-borrowers must also be at least 62
* You must own your home free and clear or have a relatively low balance on your mortgage. The balance must be paid off in order to receive the mortgage but, you can use the cash you receive from your HECM to pay it off. 
* You must receive reverse mortgage counseling from a HUD approved counseling agency before your application is processed. Once you complete your counseling, you will receive a certificate of HECM counseling that will be good for 180 cays.
* The property can be no more than a four-unit dwelling or a unit in a condominium or planned development project in a FHA approved development.
 
HUD has a formula that it uses to determine the amount of money that you can borrow. There are 3 factors that are taken into account. The first is the age of the youngest borrower because of the amount of monthly advances that will be made. Second, is the “maximum claim amount”, which is either the appraisal amount of your home or the maximum loan amount that can be insured by the FHA for homes in your area. And third, is the expected average mortgage interest rate because the lower the interest rate, the lower the cost of the loan and that means you will have more borrowing power.
 
Once you are approved, you can choose from 6 different ways to be paid:
 
*     Monthly, which would be for as long as you live in your home.
*    Term, would be for a specific amount of time
*    You can get it as a line of credit
*    Modified term, which is a combination of Term and a line of credit
*    Modified Monthly, which is a combination of monthly as well as a line of credit.
*    Or, you can get your money in one lump sum.
 
Regardless of the plan you choose, you do not have to repay the loan as long as you remain in your home.
Another great things about this type of reverse mortgage is that you have the ability to change your payment type at any time and as many times as you want.   So,  let’s say you are on a monthly plan and you need a new roof on your home, you can add the line of credit option to your plan without having to pay a new loan origination fee. The only fee you would have to pay would be an administrative charge of no more than $20 each time you request a change.
 
Payments made to you with an HECM will not affect your Social Security or Medicare eligibility or benefits but if you receive SSI or Medicaid, your payments may be affected since both of these are based on need. You will need to check with your local Area Agency on Aging office to make sure it will not affect these or other programs that you receive benefits from.
 
Before taking out an HECM or any other reverse mortgage, you must keep in mind the repayment of the loan. With an HECM loan, the balance of the loan is due when you no longer occupy your home. It is due in one payment which can be made from the sale of your home.

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