Common Questions On Home Equity Conversion Mortgage
When a reverse mortgage is being explored as an option to pay for care at home, it is beneficial to better understand how these types of non-traditional mortgages work.
How To Find A Reverse Mortgage
Reverse mortgages are heavily advertised, so its easy to find one, but borrowers shouldnt rush into a loan. Even if the loan is legitimate, it may not be the best tool for your financial situation. For example, the Consumer Financial Protection Bureau warns that some seniors feel pressured to take out a reverse mortgage when their homes need repairs. Seniors facing mounting medical costs may also take out a reverse mortgage before considering whether those costs could be covered through other means. Most seniors should consider other funding options for their needs before opting for a reverse mortgage.
Before shopping for a reverse mortgage, youll need to consult with a HECM counselor to learn about the implications of taking out a reverse mortgage. You may also want to talk to a trusted financial planner before taking out the loan.
Once youre certain that youre a good candidate for a reverse mortgage, its time to shop around. Its always a good idea to ask a trusted financial adviser to help you find a good HECM lender. You can also potentially compare several reverse loan offers at once on LendingTree. This will allow you to review rates and terms from several lenders so that you can choose the option that best suits your needs. After narrowing down your search to a few lenders, youll want to speak with a loan officer from each company. The loan officer should communicate clearly with you and help you understand the risks and benefits of a reverse mortgage.
How To Use A Reverse Mortgage During Retirement
Many boomers approaching retirement age come into retirement with their house as their largest asset. Since reverse mortgages allow seniors to turn their home equity into cash, the loan can make sense in a variety of situations.
Jason Parker, a certified retirement financial adviser and founder of the Retirement Budget Calculator, told LendingTree: My clients taking out a reverse mortgage come from a wide swath of backgrounds. Its not just people who need to tap into their equity as an asset of last resort.
These are a few common ways to use the funds from a HECM:
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Will A Hecm Reverse Mortgage Cause Me To Lose Public Assistance
Not unless you manage your affairs carelessly. While eligibility for Medicaid and Supplemental Security Income limits liquid assets to $2,000 for an individual and $3,000 for a married couple, it should be relatively easy to draw HECM funds as they are needed, avoiding sizeable asset accumulations. A HECM credit line is not counted as a liquid asset.
The Home Equity Conversion Mortgage: In Review
Reverse mortgages can be pretty confusing. Even if you do qualify for one, there are tons of costs and fees and red tape to get through. On top of that, many of the reverse mortgages you find out in the wild are more like scams than anything else.
Thats why the HUDs take on the typical reverse mortgage is a breath of fresh air. In creating the HECM program, the FHA has provided a trustworthy source for a set of awesome reverse mortgage loan packages that are practically tailored for a borrowers needs. Okay, so you probably wont be able to avoid the fees, or the red tape for that matter, but at least you can rest easy that youre getting a reliable reverse mortgage with a pretty decent interest rate. And you can eve refinance when the opportunity arrives. Peace of mind after retirement never looked so good.
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How Big Of A Hecm Loan Can I Get
The amount of your HECM loan will depend on your age, current interest rates, and your homes value. The maximum HECM loan amount in 2021 is $822,375.
One of the most advantageous characteristics of the HECM loan is that its credit line grows if you have a credit balance. For example, if you were to take a HECM line of credit for $150,000 and withdraw $20,000 the first year, youd have a balance of $130,000 left. However, the $130,000 grows at the same interest rate youre being charged on your loan balance. Lets say your interest rate is 5%. The following year, your new total credit line to draw from would be $136,500 .
Assuming there is no qualifying non-borrowing spouse, the loan must be repaid when the last remaining borrower dies or sells the home. At that time, the sale of the home repays the HECM loan. However, if your heirs would like to keep the home, they have the option to pay off the loan.
How Is A Hecm Different From A Home Equity Loan
A home equity loan also issues cash based on equity but requires monthly payments shortly after the funds are received. With a reverse mortgage, monthly payments on the loan are optional. As long as borrowers continue to pay their property taxes and insurance and maintain the home, payment of the HECM only comes due when the borrower moves out of the home sells the home or passes away.
Another difference between the HECM and home equity loan is that the HECM offers more ways to receive your proceeds. While a home equity loan only disburses your funds in one lump sum payment, a HECM offers a lump sum payment, monthly payments or a line of credit.
Eligibility requirements are different, too.
Get approved to refinance.
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% Introductory Interest Rate Credit Card
Purpose Credit cards with a 0% introductory interest rate are best used for short-term borrowing.
Method If you have a high credit score and a low debt-to-income ratio, you might be able to use a credit card as a HELOC alternative. You should look for cards with a 0% introductory annual percentage rate on purchases, then choose the card with the longest introductory period.
Pros A 0% introductory APR credit card is even less expensive than a HELOC, and the introductory period may also be longer than the low interest rate introductory period offered by some HELOCs.
Cons To avoid losing the 0% introductory rate on your credit card, you generally cant be late more than 60 days on a single monthly payment. Furthermore, while you are only required to make the minimum monthly payment on the card, you will actually have to make fixed monthly payments that are large enough to pay off the entire balance before the introductory period expires. If you dont, youll suddenly be hit with high interest payments. Paying the entire loan back during the introductory period means that youll have much less time to pay back your loan than with a HELOC.
What Are The Benefits Of A Reverse Mortgage Line Of Credit
1. Enjoy retirement more now knowing your RLOC is a backstop later. The biggest benefit of taking out a reverse mortgage line of credit is its a great backstop for your retirement plan! Weve run many retirement plans which were OK, but not confidence inspiring. Oftentimes clients will curtail the vacation theyve always dreamed of, or put off remodeling their home because they fear dying broke.
When you add the potential cash flow from a reverse mortgage line of credit their plan results often skyrocket! This gives them a great confidence in spending a bit more now while theyre young knowing they have a backstop later in retirement if they actually need it.
2. Liquidity for many purposes. Theres no requirement to pull money from your RLOC. Its there to use only if necessary and provides liquidity. You can use it for retirement income during a bear market which allows you to stop drawing from your investments and rebalance into stocks while theyre cheap. You can use it to pay taxes on Roth conversions which will help you reduce your long term taxes.
You can use the RLOC for long term care or other unexpected medical expenses. As a matter of fact you can use the funds which are TAX FREE for anything! The reverse mortgage line of credit provides the ultimate source of current or future liquidity.
They drew $1,500 per month at age 80 until they died at age 95. Click the graph to enlarge:
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Who Is The Hecm Reverse Mortgage Good For
For the right person, the HECM reverse mortgage is an outstanding product. But its not for everyone.
Its a special home loan designed to help homeowners trade some of their home equity for cash. For many people, mortgages like home equity loans, home equity lines of credit, and cash-out refinancing are better choices.
But for one group of borrowers, HECM loans are not just the best option they are the only choice,
Home Equity Conversion Mortgage Basics: How The Hecm Works
Home Equity Conversion Mortgages are the only reverse mortgage product that is insured by the United States government. Like most reverse mortgage loans, a HECM is an amazing way for homeowners over the age of 62 to earn some extra income without relying solely on social security or pension funds.
With the home equity conversion mortgage, many of the common reverse mortgage rules still apply. For instance:
Borrowers must live in the home as a primary residence in order to even qualify, and must remain living in the home.
The loan is only due to be repaid if the borrowers move from the home, sell the home, or pass away.
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How Much Equity Is Needed To Get A Reverse Mortgage
Home equity is derived by subtracting any outstanding secured debts against the home from the appraised value of your home. The total amount that you can borrow must be greater than or equal to any outstanding secured debt on the home. To get a reverse mortgage, your home must be valued at a minimum of $200,000.
How Much Can You Borrow With A Reverse Mortgage
The proceeds that youll receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount that you can borrow will be based on the youngest borrowers age, the loans interest rate, and the lesser of your homes appraised value or the FHAs maximum claim amount, which is $822,375 as of Jan. 1, 2021.
However, you cant borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loans expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your propertys appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds that youll receive because the lender wont withhold part of them to pay property taxes and homeowners insurance on your behalf.
How much you can actually borrow is based on whats called the initial principal limit. In January 2021, the maximum initial principal limit was $822,375. The average borrowers initial principal limit is about 58% of the maximum claim amount.
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How Do Reverse Mortgages Work
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you dont have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages offered by some state and local government agencies, as well as non-profits proprietary reverse mortgages private loans and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages .
Requirements Of All Hecm Loans
The HECM program has several requirements. Among the requirements of the borrower:
- The borrower must be 62 years or older
- The borrower must own the property, or have a low enough mortgage balance remaining that the existing loan can be paid off with a HECM loan
- All borrowers must take part in a Department of Housing and Urban Development-approved counseling session
- The home must be the borrowers primary residence
- The borrower must not have any delinquent federal loans
- The borrower must meet financial assessment requirements as set by the lender, which may include a credit score minimum and income qualification
Qualifying property types include 14-unit dwellings and condo units that are FHA-approved.
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Should You Get A Reverse Mortgage
A reverse mortgage may be helpful but isnt for everyone. There are a few factors that can make a reverse mortgage worth it:
- Your home is increasing in value considerably. If youre building up a lot of equity in your home, you may be able to take out a reverse mortgage and still have money left over for your estate.
- You plan to stay in your home for a long time. Just like a regular mortgage, there are significant upfront costs associated with the loan. Youll want to be sure you plan to live in that home long enough to make those costs worth it.
- You can cover the costs of your home. Since staying current on property taxes, insurance, maintenance, etc. is required to keep your reverse mortgage current, its important that you have plenty of cash flow for these expenses.
Ultimately, the decision to take out a reverse mortgage is one you should weigh very carefully. Though its an easy way to get cash, it could put your finances at more risk in the long run. Be sure you fully understand reverse mortgage pros and cons before taking one on.
Who Shouldnt Take Out A Reverse Mortgage
Taking out a reverse mortgage is a huge decision. Before you take one out, you need to consider your options. Even if you qualify for a reverse mortgage, it may not be the best decision for you.
People planning to invest the proceeds. You can use the proceeds from a reverse mortgage for almost any purpose, but Parker advises borrowers not to use a reverse mortgage to invest or purchase life insurance products. If you want to use a reverse mortgage to extend the life of your nest egg, you should work closely with a financial planner. A planner can help you decide when to open the reverse mortgage, and when to draw funds from it.
People who want to pass the house on to heirs. When you take out a reverse mortgage, youll slowly lose equity in your house. Your children will have to pay off the reverse mortgage to keep the house, but theres no guarantee that your children will have the financial resources to do so. People who have owned a house for generations should avoid a reverse mortgage if they want to pass on the home.
People who can fund their expenses through entitlements or other sources. Even if your retirement accounts are depleted, turning to a high-cost reverse mortgage doesnt always make sense. Before opting for a reverse mortgage, Ross helps clients consider: Are there other ways to get funds need? might qualify for veterans benefits or Medicaid benefits. In some cases, loans such as a HELOC or home equity loan may be a better choice.
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