There are many misconceptions about what a Reverse Mortgage is. So let’s clear the air on what it is and what it is NOT. Reverse Mortgages are now commonly referred to as Home Equity Conversion Mortgages, or HECMs for short. Previously, they were known as Reverse Annuity Mortgages, or RAM. A HECM is designed to help a homeowner tap into the equity in their home while not making any mortgage payments. In its simplest terms, an HECM is a Home Equity Line of Credit that does not have a payment feature (although the property taxes and homeowners insurance must still be maintained and paid for by the homeowner). Interest accrues only on the amount of equity that is harvested out of the home. The interest that would have normally been paid from a mortgage payment is simply added to the mortgage balance. So basically, every month the mortgage balance increases.
A common misconception is that the homeowner “gives up the title of their home to the bank” or “the bank keeps all the equity in the home.” These are simply not true. The title is held by the homeowner and the property can be sold or the mortgage can be refinanced and the HECM loan balance is paid off, any excess funds become equity or sale proceeds to the homeowner. The homeowner is full control. What an HECM does is provide a homeowner who is “house rich” and “cash poor” the ability to have much greater cash flow, as they are not making mortgage payments. Essentially, they are living off the equity in their home.
The Housing and Community Development Act of 1987, which was signed into law on February 5, 1988, gave way for the creation of the HECM. HECMs are government insured mortgages, insured by the FHA (Federal Housing Administration).
Under the Housing and Economic Recovery Act of 2008, the HECM rules were changed to allow for a purchase money mortgage with a HECM loan. The “HECM for Purchase” program became effective January 2009. This program was designed to allow the elderly to make a home purchase with a reverse mortgage within a single transaction, eliminating the need for a second closing.
On an HECM purchase, the down payment ranges from 45 to 62% of the purchase price, depending on the buyer’s age and other factors.
Candidates for an HECM loan must be 62 years or older. The HECM loan can be applied only to the primary residence, not a rental or second home. The residence can be a single family home, condo, townhome or two-to-four unit multi-family dwelling.
Under the non-recourse feature, the borrower can never owe more than the home is worth when the loan is repaid. The property is the only source of repayment, regardless of the loan balance at maturity (or when the property is sold). Essentially, FHA will eat any loss or negative sale proceeds.
An HECM Example
Karen’s husband passed and was ready to downsize to a smaller home. She wanted to “pay cash” and only had about $250,000 from the sale of her home. Sadly, home prices and limited available inventory left Karen’s options dismal at best. Using an HECM, we managed to secure Karen the retirement home of her dreams with a $350,000 purchase. Karen put down $180,000 and financed $170,000 with an HECM. The $70,000 left over gave Karen the freedom to use the funds for vacation, retirement or a better quality of life instead of being locked up in equity in her home. QCBN
By Peter Medal
To learn more about how an HECM for Purchase can work for you, contact The Prescott Elite Team at My Home Group, R.E.
Andrea Mauk, Peter Medal and Leslie Nelson are the Principals of the Prescott Elite Team at My Home Group Real Estate. Their offices are in downtown Prescott at 240 S. Montezuma Street, Suite 101. Reach them at 928.597.5151 PrescottEliteTeam.com or PrescottEliteTeam@gmail.com.