Home Equity Conversion Mortgage

• A reverse mortgage is a loan based on the equity in your home. The HECM is a reverse mortgage with high costs at the initiation of the loan, but it allows the most equity to be withdrawn. Most reverse mortgages provide an equity mortgage from existing ownership. HUD also allows the borrower to use an HECM to purchase a new home if the borrower has funds for the difference between the sales price and the HECM proceeds, along with closing costs. This allows the senior to purchase the home and get a reverse mortgage in one transaction. The HECM Saver reduces the front-end cost by decreasing the mortgage insurance premium. In exchange for this, the borrower receives a lower percentage of equity with the Saver reverse mortgage.
  
  

Borrower Specifications

• Borrowers must be at least 62 years of age and have little debt remaining on the home. The home must be the principal residence, and the borrower cannot be delinquent on any federal debt. This includes taxes, student or farm loans, overpayments or miscellaneous administrative fees. HUD requires counseling for each senior interested in a reverse mortgage so that the homeowner understands the concept and the implications of the contract. HUD does not require employment for a reverse mortgage, and the lender can roll closing costs into the mortgage.
  
  

Terms

• The HECM and the HECM Saver require no repayment as long as the borrower resides in the home. The borrower has several choices of equity payout. A tenure plan pays the homeowner for as long as one of the borrowers resides in the home. A term plan establishes equal monthly payments over a specific length of time. A line of credit allows the borrower to choose when he wants an installment payment until the funds are exhausted. A modified term allows a line of credit and payments over a specific length of time while a modified tenure allows a line of credit and scheduled monthly payments for as long as a borrower remains in the home.
  
  

Fees

• Closing costs and fees for reverse mortgages are higher than for conventional mortgages. The origination fee for the loan can be 2 percent up to $200,000 and 1 percent above that. The mortgage insurance is high at the closing for an HECM at 2 percent. Mortgage insurance for the Saver is .1 percent. During the life of the loan, the mortgage insurance is 1.25 percent annually, based on the mortgage balance. Lenders may charge a servicing fee of $30 to $35 a month for the life of the loan. Interest rates may be adjustable, up to 5 percent over the life of the loan.
  
  

Upkeep

• You must maintain the home and pay taxes and insurance, or you will violate the terms of the contract. You must live in the home; and if you are gone for a period of 12 months, even in a nursing home, you are in violation of the contract. HUD and FHA consider foreclosure on a reverse mortgage as the last option since these federal agencies want to allow the senior to retain the home.