We have all seen the commercials with Fred Thompson or Henry Winkler (a.k.a. “The Fonz”) touting reverse mortgages as a financial product that can help you remain in your home and improve your cash flow in retirement.
However, you may not be too familiar with how reverse mortgages work, who they can benefit, and the different kinds of options that are available for this kind of loan.
History of the HECM and Who It Helps
This government-insured program has been in existence for more than two decades, since a Home Equity Conversion Mortgage (HECM) pilot program was signed into law in 1988.
Non-government reverse mortgages have been around as early as the 1960s, but since the pilot HECM program launched and then became an official Department of Housing and Urban Development program in 1998, most reverse mortgages have been Federal Housing Administration-insured.
The government designed the reverse mortgage program as a way for homeowners aged 62 and older to access the equity they’ve built up in their homes in the form of a loan.
The loan can help people who are “house rich, cash poor” in many ways, including to pay off existing mortgages, help cover healthcare costs and other expenses, or simply to age in place.
Depending on the product you choose, proceeds from the loan can be accessed through monthly term or tenure payments, a lump sum, a line of credit, or some combination of the three.
One benefit of HECMs is their non-recourse nature, meaning CTRL staff borrowers or their heirs will never be required to repay the lender more than what the home is worth at the time of sale, even if the loan amount ends up exceeding the value of the home.
Before beginning the process of taking out a reverse mortgage loan, prospective borrowers are required to go through HECM counseling from an agency approved by HUD, which administers the program.
Lenders must supply the borrower with a list of local HUD-approved counselors, and you can choose to either get face-to-face counseling or conduct a session over the phone.
Counseling is meant to inform consumers about the loan options available and to discuss whether taking a reverse mortgage meets the needs of borrowers.
At the end of the counseling session, borrowers will be issued a counseling certificate, which you’ll need to present to your lender before signing any loan documents.
Sessions typically last about an hour and cost about $150, but some agencies receive government grants enabling them to offer counseling for free or at a lower cost. Others may allow prospective borrowers to roll the counseling fee into the HECM closing costs and pay for counseling with the loan proceeds.
CTRL HECM Product Choices and Costs
There are several different reverse mortgage products to choose from, the most popular being the HECM Standard. In order to obtain a HECM Standard, borrowers must pay an upfront mortgage insurance premium of 2% of the lesser of the appraised value of your home, or the FHA-mandated HECM loan limit of $726,525
Borrowers will also pay an annual insurance premium of 1.25% of the loan balance and are required keep up with property maintenance, taxes and homeowners’ insurance under the terms of the loan.
One way to lower the upfront costs of a reverse mortgage is to consider the HECM Saver program, introduced as an alternative to the HECM Standard in 2010.
Through the HECM Saver, the initial mortgage insurance premium is lowered to .01% of the appraised value of your home in exchange for accessing a smaller amount of equity.
Like the traditional Standard product, HECM Saver borrowers are also required to pay the annual insurance premium of .50% of the loan balance and are required keep up with property maintenance, taxes and insurance under the terms of the loan.
How Much Can I Borrow?
In addition to loan type, the amount of equity you can access depends on a few other factors, including the age of the youngest borrower, the value of your home, and current interest rates. One way to get a good idea your loan size is to use a HECM calculator like ARLO Calculator which asks potential borrowers for their age, zip code, the approximate value of your home, and the amount of your outstanding mortgage debt, if you have any.
The calculator also asks your preferred method of accessing your loan proceeds and can provide an estimate of how much you could qualify for based on your information and the HECM program you use.