Seniors, aged 62 and older, may have the ability to take equity out of their home, but not in the traditional sense that you think. Your standard home equity loan requires borrowers to qualify for a loan based on their credit score, income, and liabilities. The Home Equity Conversion Mortgage loan, on the other hand, is a reverse mortgage that allows you to use the equity you’ve built up in your home through the years. You can use the HECM to pay for medical bills, travel, or any other way you see fit.
Qualifying for the Home Equity Conversion Mortgage
In order to qualify for the Home Equity Conversion Mortgage, you’ll need to meet the following requirements:
- You must be at least 62 years old
- You must own the home outright (if there’s a mortgage, it should be a small balance)
- You must live in the property as your primary residence
- You must not have any previous defaults on federal loans
- You must be able to prove that you can pay the taxes, homeowner’s insurance and maintenance on time
- You must take HUD-approved counseling
As far as the property is concerned, you can use the HECM on any single-family or 1-4 unit property including townhomes and condos. If you do live in a condo or townhome, though, it must be a development already approved by the FHA.
In order to qualify for the loan, you’ll need to prove a timely history of real estate tax and homeowner’s insurance payments. The lender may also verify your credit score, income, and liabilities to make sure that you can comfortably keep up with the routine costs of the home.
Receiving the Funds
The amount of money you receive depends on several factors. The largest is obviously the value of the home. The two other factors are the age of the youngest borrower (must be over 62) and the current interest rates. The younger the borrower(s), the less money you’ll receive per month because it’s estimated that you’ll live in the home longer than someone that is older.
You have a few options regarding how you will receive the funds for your home equity conversion mortgage. Fixed rate mortgage borrowers have one choice – a lump sum payment. You receive all of the money at once and then do with it as you see fit.
Adjustable rate borrowers have a few more options:
- Tenure – Receive the money in equal installments for as long as you live in the home
- Term – Receive the money in equal installments for a fixed period
- Line of credit – The money sits in an account where you can draw the funds as needed
- Modified tenure – You receive a small amount of money in equal installments as long as you live in the home and the remaining funds sit in a line of credit account
- Modified term – You receive a small amount of money in equal installments for a fixed period and the remaining funds sit in a line of credit account
What Does the HECM Cost?
The HECM comes with closing costs, much like a regular mortgage. You can opt to pay them in cash at the closing or wrap them into the loan. Keep in mind, if you wrap them into the loan, though, you reduce the amount of cash available to you.
Some of the fees you’ll pay include:
- Lender’s fee – Lender’s charge an origination fee on the loan amount. HUD allows them to charge 2% of your home’s value (up to $200,000) plus 1% of any additional value of the home after the $200,000. If your home is worth less than $200,000, the lender can charge $2,500.
- Mortgage insurance – You’ll pay premiums for mortgage insurance, both upfront and annually. The upfront cost can be paid at the closing or wrapped into the loan, taking away from the proceeds. Right now, the upfront cost is 2% of the loan amount. The annual amount is equal to 0.5% of the outstanding loan amount.
- Appraisal and title fees – Just like a regular mortgage, you’ll pay other charges involved in underwriting a loan including appraisal, title, credit report, and recording fees.
- Servicing fee – Your loan servicer may charge you between $30 and $35 per month to service your reverse mortgage. This fee covers the cost of disbursing the funds each month and keeping up to date on the status of your real estate taxes and homeowner’s insurance.
The Home Equity Conversion Mortgage is a mortgage that gives you access to the funds you have tied up in your home. Unlike a standard mortgage, you don’t make payments on a monthly basis. Instead, you pay it all back when you leave the home (sell it). You must be over the age of 62, though, and the older you are at loan origination, the better.