A Home Equity Conversion Mortgage (HECM) is the formal name of the federally-administered loan that many commonly refer to as the ‘reverse mortgage’ loan. The Home Equity Conversion Mortgage is administered by H.U.D. (The Department of Housing & Urban Development) and may help qualified homeowners 62 and older, to enhance their cash flow during retirement.
Questions To Ponder
Do I have the financial resources to help my parents with their medical and living expenses?
Is there a concern from other siblings as to inheriting the home or the equity?
What are my parents’ wishes as to staying home if medical care is needed for an extended time?
Will Mom and Dad use up my inheritance?
While tapping into their equity, your parents’ home may appreciate in value, which could allow for some equity to be left at the end of the loan. They are also able to live more comfortably without having to depend on family members to support them.
Will the bank take their home?
No, the bank will not take their home as long as they continue to meet the loan guidelines. However, they must keep their property taxes current, keep required homeowner’s insurance in force and the home in good repair. Failure to do these things could result in the loan being called due and payable. Throughout the life of the reverse mortgage, your parents will continue to own their home and retain title.
How much money will they owe when the loan has to be repaid?
Your parents will owe the total amount borrowed, accrued mortgage insurance premiums, accumulated interest, servicing fees, and any other costs and fees financed through the loan amount.
How do my parents repay the loan?
There are three viable options for your parents. They can sell their home to repay the lender and collect any leftover proceeds, choose to reimburse the lender directly from a personal account or refinance the loan.
What happens to the equity if my parents or I decide to repay the loan by selling the house?
There are two options. Either your parents or the heirs can keep the home and pay the balance due on the reverse mortgage, or they can decide to sell the home and use the proceeds to pay off the reverse mortgage. Either way, any remaining equity is retained by the owners or heirs.
What happens to my mom and dad’s house if they move into a senior care facility?
A reverse mortgage becomes due and payable when the last borrower moves out of his or her home permanently. For instance, moving into a senior care facility, selling the home, passing away or moving in with the children.
What happens if the loan balance becomes greater than the value of the home?
The Home Equity Conversion Mortgage (HECM) is a non-recourse loan, which means that the loan is only secured by the home and the property. As HECM borrowers, your parents pay a mortgage insurance premium to the U.S. Department of Housing and Urban Development (HUD). This insurance protects the borrower in that they will not be responsible for more than the value of their home when the loan becomes due and payable. Heirs wishing to retain the home after the loan becomes due may choose to pay the lesser of the (1) loan balance or, (2) 95% of the home’s appraised value, less any closing costs and real estate commissions.
What are the risks my parents would be taking in receiving a reverse mortgage?
A reverse mortgage typically doesn’t affect regular Social Security or Medicare benefits. To find out if it impacts other federal or state assistance or medical programs, contact your reverse mortgage lender, tax attorney, or counseling agency. A reverse mortgage loan is secured by a mortgage on the home and failure to comply with loan terms could result in foreclosure. All risks should be identified and discussed with your own attorney and/or financial advisor.
Are there restrictions on how my parents spend their money?
Your parents can spend their money any way they choose. Borrowers have often used a reverse mortgage to eliminate an existing mortgage payments,* payoff other debts, home improvements, vacations or replace an aging vehicle. The money can be used for anything they desire. (*The existing mortgage debt is refinanced into the reverse mortgage loan.)
Is there any information that provides what all of the fees will be?
The lender is required to provide your parents with the Total Annual Loan Cost, or “TALC” disclosure, which is required by the Federal Reserve Board. The TALC displays the total transaction costs over the projected life of the loan, which will allow your parents to see all costs related to the reverse mortgage.
A Note To Trusted Advisors
A reverse mortgage is not for everyone. Our goal is to work with trusted financial and legal advisors to help determine if a reverse mortgage meets the needs of your client. We can accomplish this by providing detailed loan scenarios to you (with your client’s permission) and personal consultation with our staff to help reach a decision that is in the best interest of all parties. We are up front with all our clients about the advantages and disadvantages of a reverse mortgage.
Inform senior borrowers of the many advantages that Reverse Mortgages can provide.
Reverse mortgages provide many advantages for the senior borrower. Here is a short list of just a few:
- Proceeds received from a reverse mortgage typically do not affect Social Security or Medicare.
- Provides access to their home equity without the requirement of monthly mortgage payments. Borrowers must continue to meet ongoing property obligations such as homeowner’s insurance and property tax payments.
- Could allow senior to purchase a new home with no monthly principal and interest mortgage payments.
- Could provide a source of cash flow while borrower allows their investments to recover from market losses.
- Improves a senior’s standard of living or allows them to live out their non-working years with fewer financial worries.
- Pays off existing mortgage freeing up monthly cash flow which would have been committed to ongoing mortgage payments. With the reverse mortgage, there are no more required principal and interest mortgage payments.
- Borrowers are required to live in their home as their primary residence, continue making payments for homeowner’s insurance and property tax charges and maintain the property per HUD requirements.
- Allows the senior to maintain their independence while living in their own home.
- Provides money for in-home health care or medical expenses.
- Potential foreclosure of the home if the borrower does not meet the ongoing obligations of the loan such as paying property taxes, homeowner’s insurance or other required property charges, and must maintain the property per HUD requirements.
- Spends part of the equity that would be passed on to the estate or children.
- Increasing loan balance, decreased equity over time.
- May affect eligibility for needs-based programs such as Medicaid.
- For those itemizing tax deductions, a reverse mortgage can eliminate the deduction for home interest if no interest is paid out of pocket. However, if the homeowner pays the upfront fees and the accruing interest, the homeowner deduction may be available to them in the year the interest is paid.
- Closing costs and insurance are expensive which means the borrowers should plan on living in the home for several years to reduce overall costs.
A Potential Reverse Mortgage Borrower
There is no stereotypical reverse mortgage client. There are some considerations for those who may benefit from this unique loan.
- Substantial home equity and has a limited or fixed income.
- Wants to maintain or improve lifestyle.
- Prefers to access mortgage loan proceeds instead of other accounts or sources which may be taxable.
- Wants to remain in home and age in place utilizing a reverse mortgage.
- Home Equity Conversion Mortgages are the only Reverse Mortgages insured by FHA.