With the advent of the Home Equity Conversion Mortgage (HECM), or reverse mortgages, seniors have had an opportunity to take advantage of the equity in their homes. In many ways, this can be very beneficial. Seniors can use the money to pay off debt, make home repairs and renovations, help family members or take a trip of a lifetime.

In order to be eligible for this FHA (Federal Housing Administration) program in the United States, borrowers must:

  • Be 62 years of age or older
  • Own the property outright or have a small mortgage balance
  • Occupy the property as their principal residence
  • Not be delinquent on any federal debt
  • Participate in a consumer information session given by an approved HECM counselor

Financial Requirements and Benefits:

  • No income or credit qualifications are required of the borrower
  • Closing costs may be financed in the mortgage

An FHA reverse mortgage does not require repayment as long as the home is the client’s principal residence. Lenders recover their principal, plus interest, when the home is sold, unlike ordinary home equity loans. Any excess profit realized from the sale goes to the customers or family heirs.

Expanding options:

In this era of distressed properties, affluent people are using the reverse mortgage program to either buy or improve a second home. This process adds an entirely new slant to the sport of bargain hunting.

Once the funds are disbursed, the homeowner may spend it as they wish. Some add to their investment portfolio with the help of a financial specialist, although this can be risky.

With basic reverse mortgage funds, the maximum lending limit is $625,500, no matter the value of the owner’s home. This amount is subject to change, so refer to a mortgage specialist for current limits. In some instances, a Jumbo reverse mortgage may be obtained, but these are reserved for homeowners with higher-valued homes.

How the Program Works:

Once a homeowner has been confirmed as part of the FHA reverse mortgage program, payment plan options are as follows:

  • Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
  • Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  • Modified Tenure - combination of line of credit plus scheduled monthly payments for as long as you remain in the home.
  • Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

Term - equal monthly payments for a fixed period of months selected.

Read the fine print:

There can be a dark side to this golden goose. Unscrupulous and greedy loan providers have used their “expertise” to sway unsuspecting seniors into deals that were not as they seemed.

One example shows how two insurance agents used the reverse mortgage program to cross-sell other products to an octogenarian in Arizona. The index annuity and a life insurance policy she bought did not meet her income needs and it took a financial advisor to fix the mess. Eventually, the matter was resolved, and these fraud artists had their licenses revoked. One of them was convicted of theft in the Arizona Superior Court.

It is also important for participants in the reverse mortgage program to remember to pay their homeowner taxes and insurance. A default on the reverse mortgage could result if payments lapse on either of these important areas.

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