Reverse mortgages have been around for nearly 60 years and, during that time, have taken their fair share of knocks… from the unscrupulous peddlers to the lack of sufficient government oversight. Find out below how the Home Equity Conversion Mortgage (HECM), (the only HUD approved, FHA insured reverse mortgage available) has been turned into one of the safest mortgages available on the market today.
To be sure, HECMs aren’t for everyone. But once these 5 areas are understood, you might find them the perfect tool to finally move into that perfect 55 and over golf community or as a potential lifetime line of credit… or both!
- The Bank Will Own My Home.
A Home Equity Conversion Mortgage (FHA insured reverse) is a mortgage, and a lien, like any other on a borrower’s home. The lender’s only claim on your home is the balance of the mortgage itself at the end of the loan. While HECM loan documents are nearly identical to a typical traditional mortgage, they have far more HUD mandated protections than a typical loan provides.
In fact, with a reverse mortgage borrowers and their heirs actually have significantly more flexibility available to them than a traditional mortgage, with the ability to take up to 12 months to pay off the loan, to turn in the keys should the loan balance exceed the value of the home, or simply pay off the mortgage and keep the home.
- If I have a mortgage, I can’t get a reverse.
A HECM reverse is a standalone mortgage that replaces all mortgages that may be on a home. For many borrowers, one of the primary objectives is to be mortgage free, significantly improving monthly cashflow by eliminating monthly house payments.
Additionally, if a borrower is considering a HELOC, the benefits of a HECM become even clearer. Non-callable, regardless of the value of the home, no personal guarantees, the ability to draw on available balance for the life of the loan and the removal of the monthly obligation of making mortgage payments can be tremendously valuable alternatives for homeowners… just like when used to purchase a new home.
- Reverse mortgages have large out of pocket expenses.
Reverse mortgage closing costs are included in the balance of the loan at closing and typically require very little costs out of pocket to close. While a reverse will be somewhat more expensive than a traditional mortgage, the largest single cost may well be the mortgage insurance due at closing. But, that premium is the very reason a HECM can provide additional protections, such as allowing:
- the borrower to have no personal guarantees on the loan,
- the line of credit feature to grow independent of the actual value of the home, and
- to be non-callable (as long as the home is your primary residence and you remain current on taxes, insurance and other property fees).
So, are they more expensive to close? Yes. Does FHA and HUD guarantee significant additional benefits made available to the borrower as a result? Yes, again. And, finally, are these benefits unavailable on “normal” first mortgages or HELOCs? Absolutely yes.
- I can’t leave my house to my children.
A corollary to Myth 1, above, this stems from the misconception that a reverse mortgage means the bank owns the home. At the end of the reverse, the loan needs to be paid off like any other mortgage. At McWhorter Reverse Mortgage and Finance America Reverse, we encourage any interested party (whether heirs or financial professionals) to take an hour or so and sit in on the independent counseling required by HUD to ensure all parties are well versed in the true pros and cons of reverse.
This myth is yet another reason why your HECM reverse mortgage consultant should learn as much as possible about your individual needs. If the primary objective is to leave your home to heirs, under certain circumstances a reverse may not be the best alternative.
However, if you are looking at the HECM to:
- payoff existing mortgages to improve monthly cashflow,
- augment your long term financial plan,
- avoid relying on children for emergency spending,
- enjoy the freedom to travel when and where you desire,
- purchase that retirement (or next) home or
- any of the great reasons to have instant access to your cash,
it can indeed be the perfect solution for you.
- Reverse mortgages are only for desperate people
It is true that, originally, reverse mortgages were considered a “loan of last resort”. And while you can still get a reverse mortgage when no other loan is an option, it is an unfortunate reality today that if a financially strapped borrower seeks a reverse as a last lifeline, with new HUD financial assessments required many find they may no longer qualify. The best advice? Don’t wait until desperation to learn more about the benefits of a reverse mortgage.
As always, the above information is the tip of the iceberg in what you need to know about one of the most successful government insured (as well as non-government proprietary reverse jumbo) loan products available. As with any financial instrument, you should always consult the new HECM rules and protections with a trusted financial professional and an experienced reverse mortgage originator.
If you find yourself thinking a Home Equity Conversion Mortgage or proprietary reverse may be of interest, but still have more questions, feel free to call, text (404-313-9785), or email [email protected] and find out more!