HOW REVERSE MORTGAGES WORK
Home Equity Conversion Mortgage (HECM)
HECM is the most popular Reverse Mortgage. It was created and continues to be regulated by the U.S. Government, Department of Housing and Urban Development (HUD). HECM's make up 99% of the Reverse Mortgages processed in the United States.
This loan is insured by the Federal Housing Administration (FHA), which is part of HUD. The insurance protects the borrowers if: 1) the lender ever defaults on the loan, or 2) the value of the home upon sale is not worth enough to cover the loan balance. This guarantees that you or your heirs would not be responsible for any remaining loan balance.
The proceeds from a Reverse Mortgage can be taken in several ways, including:
- Line of Credit: You make withdrawals whenever you choose up to the amount available.
- Lump Sum: You receive all of your proceeds at the time of settlement.
- Tenure Plan: You receive fixed monthly payments as long you own and occupy the home as your primary residence.
- Combination: You can blend all of these options; for example, draw a lump sum while taking a monthly check and leave some money in a line of credit.
HECM for Purchase.
While the typical retiree uses a HECM to eliminate debts, pay for health care and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their changing needs.
The advantage of using a HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the Reverse Mortgage proceeds. This home buying process leaves you with no monthly mortgage payments.
While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn't the best, or safest, option. HECM for Purchase offers a solution to downsize into a place that is more easily navigable, more energy efficient, with lower maintenace costs, or which is closer to family and friends.
Proprietary Reverse Mortgage
Right now, very few proprietary Reverse Mortgages exist. However, they are important to mention. With current housing market trends improving, we may begin to see an increase in availability. Simply put, Proprietary Reverse Mortgages are non-FHA insured Reveverse Mortgages offered by the private sector. In most cases, proprietary Reverse Mortgages are designed for homes that are valued at $800,000 and above.