QUALIFICATIONS FOR A REVERSE MORTGAGE

Real Facts

The Home Equity Conversion Mortgage, or HECM, is the federally insured reverse mortgage product. It is insured by the Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD).

  • Someone on title must be at least 62 years old

  • You must own your home

  • The home must be your primary residence

  • A HECM must have 1st position/primary lien
    (in simple terms, it will replace any mortgage or home equity lien that may be on your home)

Loving Couple

INTEREST RATES AND COMMON FEARS

Let's Talk About It

It’s true, we were all taught that the conservative approach on our home loan is the 30-year with a fixed interest rate.  On many of your first homes, the interest rate was likely 10% or higher.  You chose the lowest possible rate you qualify for and lock in to begin paying back both the interest accrued and the principal for the next 30 years. Many times, you might have also moved as interest rates continued to drop and/or you have refinanced as needed to keep your rates low.
 
With a reverse mortgage, the interest rate is not as important as your intent for leveraging your equity, like when you may have gotten a home equity line of credit (HELOC). The term is shorter (not 30 years) and the interest will compound with or without a principal payment.  With proceeds tax free and the line of available credit increasing over time, focusing on a pure interest rate is not the only way to evaluate the cost/benefit of the loan itself. Clearly changing your mindset away from the lowest possible fixed rate will help you in evaluating the true cost/benefit of this type of mortgage.



 

You can choose to receive HECM proceeds in several ways. There are technically six ways to distribute HECM proceeds. Which option you chooses depends on the interest rate (ARM or fixed) and the borrower’s intended use for the proceeds, of course.

You Have 6 Proceed Options: 

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Smiling Portrait

Meet Kate King

  • Home Value: $300,000

  • Mortgage Balance: $7,495.42

  • Youngest Borrower Age: 70

  • Available Line of Credit today: $136,204

 

Kate owns her home and wants to establish a line of credit. Her home is valued at $300,000 and she is 70 years old. With a HECM, over the next 30 years, her loan will gradually reduce and she will have continued access to greater funds as she needs them. This is an example of one of the beautiful thing about the HECM!

HOW MUCH CAN I GET?

The Quick Answer

Factor 1 – The appraised value
(what is your house worth?) 

 

Factor 2 – The amount of money you still owe
on the primary loan and/or any Line of Credit

(called the unpaid principal balance from your current home loan(s).

 

Simply put, the approximate Loan-to-Value is 55%.
As a rule of thumb, this means that if your house is valued at $100,000 your home loans against the property need to be less than $45,000.
 

Now, the fun part, your age matters.
 
The principal limit is the amount of proceeds you qualify for and is based on the age of the youngest borrower or married spouse living at home, the property’s appraised value, the interest rate, and the Maximum Claim Amount (MCA). 

 

The principal limit generally increases each month, which means additional funds become available to you over time as the property appreciates and the borrower ages.

 

The closest example of principal limit is the maximum limit on your credit card.
 

Meet the Johnson's

The Johnson's have some retirement savings, but they are unsure if their funds will last. They have friends who’ve leveraged equity for peace of mind and want to learn more.
 

  • Home Value: $400,000

  • Payoff: $100,000

  • Youngest Borrower Age: 75

  • Available Line of Credit today: $121,200

  • Available Line of Credit in 10 years: $175,450

 

This example shows how a HECM can improve their cash flow and supplement their savings. They will remove their monthly mortgage payment and receive a substantial line of credit that can be used whenever they need extra funds.

Happy Senior Couple