Reverse Mortgage Mini-Series: Part I
At Yeske Buie, we are constantly pushing ourselves to Learn Big, one of our six established worldviews, as we believe our learning in service of our Clients never ends. Furthermore, we strive not only to Learn Big but also to Think Big by applying the best available practices and research to the day-to-day servicing of our Clients. Staying true to these worldviews, Yeske Buie has committed to learning more about reverse mortgages and how they may be used as strategic planning tools for our Clients. This initiative was partially started thanks to new regulations and requirements that made reverse mortgages a more appealing planning strategy for aging clients in multiple scenarios. In the first article of this mini-series, we aim to give you a basic overview of one of the types of reverse mortgages, Home Equity Conversion Mortgages (HECM), which are federally-insured reverse mortgages offered and regulated by the U.S. Department of Housing and Urban Development (HUD). As we build on this series, we will discuss specific numbers, details and example scenarios in which a HECM could be a valuable planning tool.
What is a Reverse Mortgage/HECM?
A reverse mortgage allows a homeowner to convert some or all of the equity in his or her home into cash. As opposed to traditional mortgages, with a reverse mortgage the borrower does not make a monthly payment. Instead, payments are made to the borrower, interest accrues (adjustable interest rate in most cases) on the loan total and the loan does not have to be repaid until the last borrower leaves the home permanently. When the loan is repaid (including interest), any proceeds from the sale of the home above that amount is left to the borrower’s heirs. If the home value drops below the value of the loan repayment total, only the value of the home is required to be paid back.
How are Reverse Mortgage payments received?
The payments can be received in multiple ways:
- Via equal monthly payments based on the borrower’s age for as long as the borrower lives in the home (as a primary residence), known as “Tenure”
- Via equal monthly payments based on a specific number of months, known as “Term”
- As a line of credit (cannot be frozen) via unscheduled payments at the borrower’s request, until the line of credit is used up
- As a combination of monthly payments (options 1 and 2 above) and a line of credit, known as “Modified Tenure” and “Modified Term”, respectively
- As a lump sum distribution – this option is only available on fixed-rate loans which typically offer less money to the borrower than other HECM options
What are the Requirements?
The very first requirements that must be met to consider applying for a reverse mortgage are as follows: the homeowner must be 62 or older, have little to no regular debt remaining on the home, and must actually live in the home as a primary residence. Additionally, the homeowner cannot be delinquent on any federal debt, must be paying property taxes and other basic maintenance expenses, and show proof of income to confirm the ability to continue doing so. Assuming these requirements are met and a reverse mortgage makes sense from the Client’s financial planning standpoint, the final requirement is to meet with a HUD-approved HECM counselor for a counseling and information session.
Why use a Reverse Mortgage/HECM?
Reverse mortgages can provide additional income to aging homeowners to be used for things like: paying off the last bit of regular debt on the home, paying fixed expenses on a budget that may be becoming increasingly tight, paying for medical expenses for a homeowner who wants to age in his or her current home, and more.
Reverse mortgages can also be used to purchase a primary home where a Client has a large sum of cash available to pay the down payment, closing costs and all related expenses. This scenario will be covered in more detail in the next Reverse Mortgage post.
Keep an eye out for the next article in this series with more details on Home Equity Conversion Mortgages – how the loan value is calculated, how the payments or line of credit work and repaying the loan! We will also touch on the other types of reverse mortgages to ensure we cover all options.