Are you at least 62 years old? Do you own a home with equity in it? If so, you may be able to tap into that money and receive it as monthly income. The FHA makes it possible with their Home Equity Conversion Mortgage. You may know it as a Reverse Mortgage or HECM.
How it Works
If you own your home outright or have a very small balance on a mortgage, you may get what the FHA calls a Reverse Mortgage. Rather than making mortgage payments every month, you receive money every month. You work out the terms with the lender, determining how often you receive the money.
You do not owe any payments on a monthly basis with this program. You do not have to pay the mortgage off until you sell the home or pass away, whichever occurs first.
The Terms of the HECM
You can receive your money in several ways:
- Tenure – You’ll receive a fixed monthly payment for the rest of your life as long as you live in the home.
- Term – You determine the period for which you receive payments. Once the term ends, the payments stop.
- Line of credit – You have access to the full amount of the funds, like a credit card. You draw the funds as you need them based on the terms of the loan.
- Modified tenure – A combination of a tenure and line of credit; you receive fixed monthly payments, but have access to the full amount if you need more funds.
- Modified term – A combination of a term loan and line of credit; you receive fixed monthly payments for the predetermined term, but have access to the full amount for occasional draws.
Qualifying for the HECM is much easier than qualifying for a standard mortgage. You and your co-borrower must be at least 62 years old to apply, though.
You must have equity in your home. If you do have a mortgage, it should be small enough that you could pay it off with the proceeds of the HECM at closing. The exact loan-to-value a lender will accept varies by lender.
You must live in the home as your primary residence and you must prove you can afford the upkeep of the home. This includes paying for the real estate taxes and homeowner’s insurance. Your home can be a single-family or a multi-unit with up to four units. However, you must live in one of the units as your primary residence.
Paying Off the HECM
Paying off the HECM is as simple as selling the home. However, neither the lender nor the FHA can make you sell the home at any time. This is true even if your mortgage value exceeds the value of the home. Once you do sell the home, or the borrower passes away, the maximum amount due is equal to the value of the home.
The HECM is a great way to give yourself a guaranteed income either for a fixed period or the rest of your life. If you have the equity in your home, you can use the money while you are still alive. Just make sure you and your beneficiaries are aware of the presence of the mortgage and its need to be repaid.