Reverse Mortgage is the common name for a Home Equity Conversion Mortgage (HECM). An HECM allows the home equity you have built up to be converted into available cash for you to use however you wish. A Reverse Mortgage is available to homeowners who are 62 or older using the owner’s home as loan collateral. Like conventional mortgages, the loan is secured by a lien against the property. However, unlike conventional mortgages, there are no required payments for the life of the loan. And, since no payments are required, there are no income or credit score requirements needed to qualify. The tax-free proceeds from your Reverse Mortgage can be used for any purpose and do not have to be paid off until the owner sells or moves out of the home. What's more, the loan is insured against ever costing the owner, or the owner's estate, more than the value of the home when due. You are always free to pay off part or all of the loan at any time, just like a conventional mortgage (No prepayment penalty). But no one ever has to worry about being obligated to pay more than your home is worth when you stop living in the home.
Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA-approved lender.
A Reverse Mortgage can be used to pay off an existing mortgage, allowing seniors to securely remain in their own home for the rest of their lives, free from the burden of monthly mortgage payments. After paying off any existing liens against your home (if any), any remaining loan principal is available for you to use for whatever you wish, without restriction. You may take this equity as a single, up front, cash payment at closing (Fixed option), or select the variable, line of credit (LOC) option, which makes your home equity available to you to draw upon, as needed, in the future. There is a built in 'appreciation' factor included in the variable (LIBOR) LOC loans which actually increases the principal amount available over the years as your home value appreciates.
The FHA mortgage insurance feature, included by law in every Reverse Mortgage, protects borrowers against ever being obligated for more than their home is worth for the rest of their lives (non-recourse loan). So, if you live in your home for a long time, and the interest eventually increases the loan balance above the appraised value of the home, the government insurance, which all borrowers pay into, covers the excess loan balance over the home value when you no longer live in the home. No debt is passed on to the borrower or borrower's estate.
Borrower Responsibilities: While no loan payments are required as long as the borrower continues to occupy the home, the borrower is required to:
Social Security: Cash distribution from a Reverse Mortgage will not affect your Social Security or Medicare benefits.
The proceeds from HECM Loans are not considered income.
Title: You or your estate retain full ownership until the home is sold.