A comprehensive FAQ on HECM reverse mortgages, with answers by Dr. Jack Guttentag - one of the world premier authorities on forward and reverse mortgages.

Questions and Answers About HECM Reverse Mortgages

January 8, 2021

Questions and Answers About HECM Reverse Mortgages

Background

Q: I'm a retired homeowner, should I consider a reverse mortgage?

A: If your life would be enhanced by having more spendable funds, and if you are not committed to leaving a debt-free home to your estate, the answer is “yes”.

Q: Exactly what is a reverse mortgage?

A: It is a loan made to an elderly person that is secured by a mortgage on the borrower’s house, which need not be repaid until the borrower dies or permanently leaves the house.

Q: What is a HECM?

A: HECM, which stands for “home equity conversion mortgage,” is a reverse mortgage program sponsored by HUD and insured by FHA. With a HECM the borrower is insured against the risk that the lender will default on its obligation to advance funds to the borrower. The lender in turn is insured against the risk of loss in the event that the net proceeds realized from sale of the property when the borrower dies or moves out will be less than the mortgage loan balance at that time. The HECM program is also unique in the wide variety of options it offers borrowers for drawing funds, and it dominates the market in the US.

Q: Are there other types of reverse mortgage?

A: Historically there have been many but most are defunct. Aside from HECMs, the only other reverse mortgages offered in the US today are the “jumbos”, which are roughly modeled on HECMs, but they are not insured or regulated by HUD, and the rates and fees paid by the borrower are higher than those on HECMs. Jumbos allow owners of high-priced homes to borrow more than is allowed on HECMs. During 2021, the maximum property value on which HECM loan amounts could be based was $822,375.

All the questions and answers provided here apply to the HECM program only.

Q: What Are the Strategic Ways to Use a HECM Reverse Mortgage?

A: An obvious strategy is to generate more spendable funds over a retiree’s lifespan. A combination HECM credit line and annuity is more effective than simply drawing a tenure payment on a stand-alone HECM. For further information on this option, see Retirement Finance In A Low Interest Rate Economy (Homeowner Retirees Can Benefit If They Select The Right Reverse Mortgage).

Another strategy is to use a HECM as a way of storing acorns for the future. This can be done by taking out a credit line and allowing it to grow until it is needed. See Using A HECM Reverse Mortgage To Prevent Future Impoverishment.

A third strategy is to use a HECM credit line as a reserve against potential losses on a high return/high risk portfolio of assets. If the reserve is not needed, it can be withdrawn for use as spendable funds. This strategy is discussed in Integrating the Components of a Retirement Plan.

A strategy for those who wish to retire partially for a period is to purchase an annuity on which payments are deferred until full retirement while drawing smaller amounts against a HECM credit line during the partial retirement period. The unused part of the line would grow during the period, accruing a reserve. The reserve would be used to purchase a second annuity beginning at the same time as the deferred annuity, generating the desired jump in spendable funds at full retirement.

See Partial Retirement: An Inevitable Trend That Needs Support

Getting Started

Q: What are the steps in getting a HECM reverse mortgage as a stand-alone?

A:

  • Step 1: Don’t respond to uninvited solicitations, this market has its share of hustlers.
  • Step 2: Explore state and local programs that might meet your needs.
  • Step 3: Educate yourself about HECM reverse mortgages in general. The questions and answers here are a good place to start.
  • Step 4: Formulate a preliminary plan of how you will draw funds.
  • Step 5: Find out how much you can draw in implementing your plan.
  • Step 6: Decide whether to proceed with a reverse mortgage.
  • Steps 7and 8: Select a lender and get counseled. For more information about these steps, read How Do I Get a Reverse Mortgage?

Q: What are the steps involved in including a HECM reverse mortgage into an integrated retirement plan?

A: To be provided.

Q: Which seniors might reject a HECM reverse mortgage and which should consider one?

A1: Reasons why seniors might say “no”:

  • They don’t need it.
  • They want to pass on a debt-free house to their heirs.
  • They want those now living in the house who cannot be included in the reverse mortgage contract to be able to continue living there after the senior’s death. [Note: A non-borrowing spouse has the right to remain but others don’t]

A2: Reasons why seniors may say “yes”

  • Retirement incomes will drop while their mortgage payments continue.
  • They will retire before 65 but want to wait until they are 65 before going on social security.
  • They are living on social security or small pensions and want to supplement their income indefinitely.
  • They are living in retirement on a nest egg, or planning to do so, and are fearful that their money might run out.
  • They seek protection against a sudden drop in their income.
  • They want to buy a house but don’t want a monthly payment.
  • They seek an effective way to manage fluctuating incomes.
  • They need a way to meet occasional expenses.
  • They plan to sell their homes within 3-7 years, but need to supplement their income in the meantime.
  • They have multiple needs that require multiple payment options.

See When to Reject a HECM Reverse Mortgage, and When to Consider One, and Using a Reverse Mortgage to Avoid Impoverishment

Q: Will a HECM reverse mortgage cause me to lose public assistance?

A: Not unless you manage your affairs carelessly. Social Security and Medicare benefits are not affected. While eligibility for Medicaid and Supplemental Security Income (SSI) limits liquid assets to $2,000 for an individual and $3,000 for a married couple, it should be relatively easy to draw HECM funds as they are needed, avoiding sizeable asset accumulations. A HECM credit line is not counted as a liquid asset.

Q: What is the most important mistake seniors make with regard to HECMs?

A: The worst mistake, made by seniors who could enhance their lives significantly by taking a HECM reverse mortgage, is not to consider it. Sometimes this is based on negative reactions from children, but more often it arises from ignorance and fear, perhaps fanned by negative news articles.

The second worst mistake, if they overcome the first, is to place themselves in the hands of the lender whose advertisement captured their eye. This can result in their being over-charged on the interest rate, the origination fee or both. It may also result in bad decisions, such as drawing an excessive amount of cash upfront.

See Why HECM Borrowers Make Mistakes.

Q: Should you pay off an existing mortgage balance before taking a HECM reverse mortgage?

A: If you acquire your HECM through my site where you can choose the lender offering the best deal, it won’t matter whether the balance is paid off as part of the HECM transaction, or paid by you beforehand. If you contact only a single lender, however – perhaps the one whose ad caught your eye – you may do better paying off the balance beforehand because the price variance between lenders is larger on transactions that include a balance payoff.

 Requirements to Participate as a Borrower

Q: Who is eligible for a HECM reverse mortgage?

A: A senior 62 or older whose principal residence is a home to which they have clear title. If there is a mortgage on the property, it must be small enough, relative to the appraised value of the property, to be paid off by a cash draw from the HECM. The borrower must be able and willing to pay the property taxes, home owner’s insurance, and maintenance charges.

Q: Can I apply for a reverse mortgage a few months before reaching age 62?

A: Yes, you can apply when you are 6 months short of 62, but you must be 62 before the transaction closes.

Q: How long must a senior own a home to be eligible for a HECM reverse mortgage?

A: The general rule is that the senior must have owned the home and lived in it as her permanent residence for 12 months, but the rule can be waived if the borrower has inherited the property and has occupied it for at least 12 months. In addition, the rule does not apply if the HECM is used to purchase a home.

Q: Can I qualify if I still have a mortgage balance on my house?

A: Yes, provided the balance is not too large relative to the property value. Any such balance must be repaid, which is usually done with a cash draw from the HECM.

Q: Does it matter if the existing balance is on a land contract?

A: No, so long as the borrower retains legal title after paying off the existing balance, it doesn’t matter what form the previous indebtedness took.

Q: How much equity do I need in my current house to qualify for a reverse mortgage?

A: There is no explicit requirement, but your equity must be large enough to cover the existing mortgage balance. If your house is worth $200,000 for example, your loan balance has to be less than $100,000. How much less varies with age and with the price of the HECM.

Q: Must you be employed to get a reverse mortgage?

A: No, because there is no required mortgage payment for which a borrower requires income. In contrast to a standard mortgage on which borrowers are required to make payments, on a reverse mortgage, borrowers can draw payments. But you do need a decent credit score because the insurer wants to be sure you pay your property taxes and homeowners insurance premium.

Q: Can a senior use a HECM reverse mortgage to purchase a condominium?

A: Yes if the condominium has been approved by FHA, no if it hasn’t. Approval applies to an entire condominium project. While FHA has announced an intention to develop a procedure for approving individual units, when that will happen is not clear.

Q: If FHA has not approved my condominium for reverse mortgages, what can I do about it?

A: You can ask the condo board, possibly with other seniors who live there, to retain a consultant to advise the board on what has to be done to make the condo eligible. It is not a big deal.

Q: If a lender pays the cost to a condo of getting FHA approval, can that lender prevent other lenders from making reverse mortgage loans to residents of that condo? 

A: No, that lender can ask residents to be grateful but residents can select any lender they want.

Q: Can I obtain a HECM on a co-op?

A: No, co-ops are not eligible because legal title to co-op units is held by the co-op, not by the occupant.

Q: Can a HECM reverse mortgage be obtained on a manufactured home?

A: Yes if the home is placed on a site owned by the homeowner, no if the homeowner does not own the site.

Q: Can a HECM reverse mortgage be obtained on a 2-4 family home?

A: Yes, if the borrower occupies one of the units as her permanent residence.

Q: Can a senior use a HECM reverse mortgage to purchase an annuity?

A: Yes, while HUD warns borrowers to beware of annuities, there are no restrictions on how funds are used. However, don’t try to execute the two transactions together because HUD prohibits HECM lenders from doing that. Your procedure should be to draw the cash first with the HECM, then purchase the annuity.

Q: Must a borrower have good credit to qualify for a HECM?

A: Until a few years ago, the answer was “no”. A credit assessment was not considered necessary because HECMs have no required monthly payment. However, when tax delinquencies began to rise, HUD issued new regulations to deal with it. Lenders are now required to assess the capacity and willingness of applicants to meet their obligations. While the process is nowhere near as rigorous as it is on standard loans, applicants with histories of not paying bills will be rejected.

Q: Can I get a HECM on a second home or vacation property?

A: No, you must occupy the home as your primary residence to qualify for a HECM reverse mortgage.

Q: What are my responsibilities after getting a HECM?

A: You are responsible for paying property taxes, homeowners insurance, HOA fees if you are in a condominium, and for maintaining the property.

Q: Can I get a HECM if my home is held in a living trust?

A: Probably you can, but the lender and the title company must approve the trust arrangement.

How HECM Reverse Mortgages Work

Q: How does a reverse mortgage differ from a standard mortgage?

A1: On a standard mortgage, you build equity over time as you pay down the loan balance. On a reverse mortgage, your equity tends to decline over time as your loan balance rises.

A2: On a standard mortgage, all funds are drawn at the outset of the transaction only. On a reverse mortgage, borrowers can draw funds at any time provided they are not maxed out from previous draws.

A3: On a standard mortgage, borrowers must make monthly payments that will pay off the loan balance over a pre-set term. On a reverse mortgage, there is no repayment obligation so long as the borrower resides in the house, the loan balance tends to rise over time, and there is no specified term. The loan is repaid when the borrower dies or moves out of the house permanently.

A4: On a standard mortgage, the payout of funds occurs once at the inception of the transaction. On a HECM reverse mortgage, payout can occur at closing, or as a monthly payment for a specified period, or as intermittent draws against a credit line.

See How Do HECM Reverse Mortgages Work?

Q: Does a reverse mortgage change the legal ownership of your home?

A: No, you remain the owner until you sell it, die or move out permanently, defined as absent a year or more.

Q: What is “reversed” in a reverse mortgage?

A: The reversal is in the typical pattern of loan balance change. On a standard mortgage, the balance usually is at its highest point when the loan is made, declining steadily thereafter until it reaches zero at the end of the term or when the balance is prepaid. On a reverse mortgage, in contrast, the initial loan balance is relatively low, it grows over time as borrowers draw funds and as interest adds to it.

Related to the reversal in loan balance change is reversal in payment flows. On a standard mortgage, the borrower is required to make a monthly payment, whereas the reverse mortgage borrower has an option to draw a specified amount as a monthly payment, or irregular amounts against a credit line.

Q: What happens to the house that secures a reverse mortgage?

A: It depends.

  • So long as the borrower is alive, she retains title to the house, though she can always sell it.
  • If the borrower dies and there is significant equity in the house, the heirs will pay off the HECM loan balance, and either keep the house for themselves or sell it.
  • If the borrower dies and the loan balance exceeds the property value, FHA assumes the loss. If the heirs want the house, they can buy it for   95% of appraised value less closing costs and Realtor commission.
  • If the deceased borrower has a non-borrowing spouse, the spouse can continue living in the house indefinitely.

See What Happens to the House That Secures a Reverse Mortgage?

Q: How does a HECM differ from a HELOC?

A: They are similar in that both provide a line of credit secured by the borrower’s house. In addition, both require the borrower to pay property taxes, homeowners insurance, and maintenance expenses. They differ in that beginning in 5 or 10 years, the HELOC borrower must begin paying down the loan balance, whereas with a HECM there is no repayment obligation so long as the borrower resides in the house. Further, with a HECM the borrower can draw a monthly payment for as long as she resides in the house. However, HECM borrowers must be 62 years of age or older.

See Is a HELOC Better Than a HECM?

Q: How do you draw funds under a reverse mortgage?

A: On a fixed-rate HECM, borrowers draw a lump sum at closing, and another lump sum after one year, and that ends it. On an adjustable-rate HECM, borrowers have the following options:

  • Fixed monthly payments for as long as the borrower resides in the house – “tenure payments”.
  • Fixed monthly payments for a specified period – “term payments”.
  • Irregular draws against a cred.it line.
  • Combination of tenure payments and credit line.
  • Combination of term payments and credit line.

Q: How much of the equity in her home does a senior give up when she takes a HECM reverse mortgage?

A: It varies widely, depending mainly on how the HECM is used and how long the borrower lives. For example, if the borrower draws only a credit line as a reserve against contingencies and dies before making use of the line, the amount of equity lost is trivial. On the other hand, if the borrower immediately begins to draw the maximum payment available for as long as she resides in her house, and lives to 100, the equity loss would be substantial. If her house failed to appreciate over that period, there would be no equity left.

See Will a HECM Reverse Mortgage Leave Nothing For My Heirs?

Q: Must I pay income taxes on funds drawn from a HECM?

A: No, the funds received are loans, not taxable income.

Q: What are the upfront costs of a HECM?

A: Upfront charges include:

  • The lender’s origination fee, which is capped at 2% of the first $200,000 of property value plus 1% of the amount over $200,000 up to a maximum of $6,000.
  • A mortgage insurance premium that is 2% of property value.
  • Third party charges including title insurance and appraisal fees, which are much the same as those on standard mortgages.

All these charges can be financed. The only out-of-pocket charge is the counseling fee, which won’t exceed $125.

Q: Is interest on a HECM deductible?

A: Only when it is paid. Accrued interest that is added to the loan balance is not deductible.  A repayment by the borrower is deductible so long as the amount does not exceed the interest that has accrued in the loan balance. In the absence of repayments, there is no deductible interest until the borrower dies or moves out of the house permanently.

Q: Can I trade off a higher interest rate for a lower origination fee as I can on a standard mortgage?

A: Yes, many lenders (including all those that post prices on my site) offer multiple combinations of rate and origination fee. My HECM calculator allows borrowers to find the particular combination that, given their financial objectives, is most beneficial.

Q: Why must I undergo counseling before I can take out a HECM?

A: The Government wanted assurance that seniors knew what they were getting into, and were not making a decision they would later regret. Hence, the rule that borrowers must provide lenders with a counseling certificate before the lender can accept an application for a HECM. The certificate must cover all co-borrowers and non-borrower spouses, and is good for 180 days.

Q: What should I expect to get out of a counseling session?

A: You should expect a discussion of the pros and cons of whether a HECM is appropriate for your situation, and what your other options might be. Don’t expect the counselor to advise you on how to draw funds on a HECM, or which lender is likely to provide the best price or service.

Q: Is there a fee for HECM counseling?

A: Yes, counselors usually charge a non-refundable fee of $125 but they waive the fee if the senior’s income is less than twice the poverty level.

Q: Where do I find a counselor?

A: Go to Find a HECM Housing Counselor on HUD’s web site. The counselors listed there are employed by non-profit firms that have been approved by HUD.

Q: Can I repay the HECM loan balance when it is convenient?

A: Yes, you can repay at any time, without penalty. In fact, when you repay, your unused credit line will increase by the same amount.

Q: Why do HECMs have two mortgages and two notes?

A: One set of documents protects the lender against a contract violation by the borrower, the other set protects the FHA against a contract violation by the lender. In the event that the lender fails to make payments due the borrower, FHA will take over the obligation while being protected by a second mortgage on the home.

Q: What is the net principal limit (NPL)?

A: It is the senior’s borrowing power using a HECM, where borrowing power is defined as the amount the senior could draw during the first year. The NPL is higher the older the senior, the higher her house value (up to a maximum that is raised every year), the lower the interest rate, and the lower the settlement costs.

See Which Reverse Mortgage Option Should I Choose?

Q: What happens to my home when I die or when my spouse dies?

A: If the surviving spouse is a co-borrower, that spouse can continue living in the house while retaining all the privileges and obligations connected to the HECM. If the surviving spouse is not a co-borrower, she can continue living in the house but cannot draw any additional funds from the HECM. If there is no spouse, the house will either be claimed by your heirs upon payment of the loan balance, or sold by HUD with any excess proceeds after loan repayment remitted to your estate.

See What Happens to the House That Secures a Reverse Mortgage.

Q: What makes a HECM reverse mortgage kosher?

The kosher HECM reverse mortgage differs from the mainstream version in the following ways:

Feature

Kosher Reverse Mortgage

Mainstream Reverse Mortgage

Price Transparency

Yes, lenders post complete prices on this site.

No, lenders keep their prices under wraps

Guidance on Options

Best, based on state-of-the-art calculator and guidance from disinterested experts.

Hit or miss, seniors consult loan officers selected primarily for their sales skills

Equity Remaining

Calculator shows the best possible estimate of home equity remaining for the senior's estate.

Not generally available.

Price Competition

Yes, seniors can select the best price on their desired HECM option from those offered by competing lenders.

No, almost all seniors accept the prices of the one loan provider they contact.

Price Lock Protection

Yes, locked prices must be identical to current prices, which seniors can check.

No, lenders can cheat with impunity when they lock.

Availability of Low-Cost Loans

Yes, lenders compete with regard to origination fees as well as interest rates.

Maybe, depending on the lender.

Availability of Shopping Guide

Yes, seniors who go through the kosher process end up with the data needed to shop the mainstream market.

Not a chance!

Availability of Ombudsman

Yes, the professor and his colleagues will act as ombudsmen if issues arise between the senior and the lender.

No.

See Introducing the Kosher HECM Reverse Mortgage.

Q: What is the largest amount a borrower can draw on a HECM?

A: The maximum depends on the property value (up to a maximum that increases every year beyond which further increases do not affect draw amounts), the age of the borrower or the borrower’s spouse, whoever is the younger, the HECM interest rate, and settlement costs including the upfront mortgage insurance premium and the lender’s origination fee. In addition, existing mortgage debt on the home, which must be paid off with the HECM, reduces the amount available to the homeowner dollar for dollar.

In 2021, a house valued at $822,675 provided the largest possible HECM. An unmarried borrower of 62 with a house of that value or higher could draw $217,000 at closing and $165,000 12 months later. If the borrower was 92, the draw amounts would be $321,000 and $236,000. If the borrower of 92 had a 42-year old spouse, the amounts would be $170,000 and $132,000.

Major Fears About Reverse Mortgages

Q: Can taking a reverse mortgage result in my losing my house?

A: It is possible but not very likely. The risk is nowhere near as great as with a standard mortgage.

The major cause of foreclosure on standard mortgages, failure to make the required monthly payment of principal and interest, does not exist on reverse mortgages, which have no such requirement. However, reverse mortgage borrowers are required to pay their property taxes and homeowners insurance, and failure to do so can lead to foreclosure and loss of the house.

Q: If I die after taking a reverse mortgage, will my spouse be forced to vacate the house?

A: No. If your spouse is a co-borrower, she will retain occupancy rights and have the same access to the HECM as before your death. If you were receiving a monthly payment, for example, the payment will continue. If your spouse is not a party to the contract because she was not yet 62 when it was executed, called a “non-borrowing spouse” or NBS, she retains occupancy rights but cannot draw any more funds from the HECM.

Q: Does taking a reverse mortgage result in no home equity passing to my heirs?

A: It could, but need not. It depends on how the borrower uses the HECM, on how long the borrower lives, and on the rate at which the property appreciates. Here are three possibilities among many:

  • The borrower draws the largest available monthly payment for as long as she resides in the house, she lives to 100, and her house doesn’t rise in value. The outcome would be zero equity available to heirs.
  • The borrower draws a credit line that is used sparingly for special needs or occasions and half of it is unused on her death at age 80. House appreciation is average. The outcome would be that significant (but not full) home equity becomes available to heirs.
  • The borrower draws a credit line to hold as insurance against the hazard of running out of money but dies before that happens. The outcome would be that heirs would inherit almost all the equity in the house.

See Will a HECM Reverse Mortgage Leave Nothing For My Heirs?

Q: If the loan balance on a HECM exceeds property value when I die, are my heirs responsible for the difference?

A: No, the loss is borne by the insurance reserve fund, into which all HECM borrowers contribute. HECM reverse mortgage loans are non-recourse loans.

Q: Can the spouse of a HECM borrower be evicted on the death of the borrower?

A: No. If the spouse was 62 at the time the HECM was taken out, she becomes a co-borrower, with draw amounts based on the age of the younger spouse. When one dies, the survivor retains all unused draw rights.

If a spouse was less than 62 when the HECM was taken out, he or she becomes a non-borrowing spouse (NBS) whose tenure in the house is protected, but unused draw rights lapse.

See A New Challenge to the HECM Reverse Mortgage Program

Q: Why is the HECM reverse mortgage market so small relative to the need

A: The main deterrents are fear, ignorance and distrust. The principal fear is losing their home. Ignorance of HECM reverse mortgages is widespread because HECMs are complicated and very unlike the standard mortgages with which most seniors purchased their homes. Distrust is a natural consequence of a dysfunctional market structure, which makes it difficult if not impossible to shop effectively, and few seniors try.

Q: Why does the Federal government support the HECM reverse mortgage program?

A: The major reason is that the HECM program reduces the burden on public services of various types that support seniors in need. These include Medicaid, single purpose loan programs directed toward home repair and property taxes, senior centers, in-home care and nutrition support.

See Should Government Support HECM Reverse Mortgages?

Q: If I change my mind after the closing, am I stuck?

A: No, you have a 3-day right of rescission, during which period you can cancel the loan. You won’t get back the fees paid to the appraiser or the counselor, and rescission won’t cancel a home purchase if the reverse mortgage was used for that purpose. If you think there is a possibility that you will change your mind, make sure you obtain all the details necessary to cancel at the closing, including names of people, telephone numbers and addresses.

Q: Does FHA mortgage insurance protect the reverse mortgage lender, the borrower, or both?

A: Both. The lender is protected against incurring a loss if the loan balance on the HECM comes to exceed the value of the property. The borrower is guaranteed that all the payments she is entitled to draw will be available.

See Borrower Protection on FHA Reverse Mortgages.

Q: What happens if I must vacate the house for health reasons?

A: You can be elsewhere for up to 12 months. But after a 12 month absence, the servicer will presume you are never going back and will take the legal steps involved in acquiring title, selling the house and paying off the HECM.

Q: Who is best positioned to protect incompetent seniors from reverse mortgage abuse at the hands of a party to whom the senior granted a Power of Attorney (POA) before becoming incompetent?

A: The lender is the only party positioned to assume that responsibility.

See Reverse Mortgages and Power of Attorney: Who Is Best Positioned to Protect an Incompetent Borrower?

Q: What actions do my heirs have to take at the time of my death?

A: Your heirs will receive a condolence letter from the servicer, which will also enumerate their options:

  • They can execute a short sale of the property for 95% of the HUD appraised value, remitting the proceeds less closing costs and Realtor commissions, to HUD as full repayment of the loan balance.
  • They can deed the property back to the lender, or simply walk away and do nothing, which would result in a foreclosure action.

Bottom line, if there is equity in the property the heirs can get it by paying off the loan, and if equity is negative they have no liability.

Q: What happens if I am unable to pay my property taxes and homeowners insurance?

A: Your servicing agent will use any remaining unused borrowing power on your HECM to pay the charges. If you have no borrowing power left, the servicing agent will request permission from FHA to initiate foreclosure proceedings.

Q: Does a borrower with a million-dollar house who takes out a HECM reverse mortgage lose all the excess equity?

A. In most cases, the only disadvantage suffered by HECM borrowers with high-value houses is that the amounts they can draw are limited by FHA rule. HECM draw amounts are based on the lower of appraised value, sale price and the FHA maximum mortgage amount, which in 2021 was $822,375. The owner of a house worth $2 million can’t draw any more funds from a HECM than the owner of a house worth $822,375.

It is true that if the house securing a HECM reverse mortgage is worth more than the FHA maximum, the borrower is in effect posting excess collateral, reducing the risk of loss to FHA but without reducing the insurance premium paid to FHA. However, this is meaningful only in the atypical case where a transaction would result in loss to FHA. That could happen if the high-priced house appreciates in value by less than 4%, which is the assumption used by FHA in determining draw amounts by borrowers. If any such cases have arisen, they are rare.

Costs and Prices of HECM Reverse Mortgages

Q: What are the different costs of a reverse mortgage?

A: An origination fee, which covers all lender costs, is capped by regulation at 2% of the first $200,000 of property value plus 1% of the remaining value up to a maximum of $6,000. An upfront mortgage insurance premium is 2% of property value (up to the maximum value). Other upfront fees covering title insurance, appraisal, credit report, document preparation, property survey, and pest inspection are much the same as on a forward mortgage. In addition, there is a monthly mortgage insurance fee of .05/12 that is added to the interest rate.

Q: How does the reverse mortgage interest rate affect the size of the borrower’s credit line?

A: The higher the interest rate at the time the borrower takes out the HECM, the lower is the credit line. However, an unused credit line grows at a rate equal to the mortgage rate plus the mortgage insurance premium, same as the loan balance, so if the rate increases aft er the loan is made, the unused line will grow faster.

Q: On standard mortgages, insurance is not required on loans that are less than 80% of property value. Why is insurance required on all HECMs regardless of how large the loan is?

A: On a standard mortgage the loan amount is at its highest point at the beginning. Every month thereafter, the balance declines as the borrower makes monthly payments. For this reason, the mortgage insurance charge is based on the borrower’s initial equity. On a reverse mortgage, in contrast, the loan balance is at its lowest point at the beginning, and rises over time – which means that equity declines over time. For this reason, the mortgage insurance charge is based on estimates of what the equity will be at the termination of the process.

Q: How are reverse mortgages priced?

A: HECM reverse mortgages are unique in using two interest rates in every transaction. One interest rate is used in calculating the borrower’s future debt and future credit line if there is one. This is the “mortgage rate” and it is comparable to the rate on standard mortgages.

The mortgage interest rate and origination fee are set for each of three loan types: fixed-rate, adjustable-rate with annual adjustments and a 5% maximum rate increase, and adjustable-rate with monthly adjustments and a 10% maximum rate increase. Within each loan type, lenders offer multiple combinations of interest rate and origination fee, which they vary with the size of the initial loan amount. The larger the initial loan amount, the lower the price.

The second interest rate is called the “expected rate” and it is the rate used in determining draw amounts – the higher the expected rate, the less the senior can draw. HUD as the insurer of HECMs defines the relationship between expected rates and draw amounts.

See Pricing of HECM Reverse Mortgages.

Q: What are the mortgage insurance charges and how are they paid?

A: You pay an upfront premium of 2% of your property value. The premium is included in the settlement costs that are financed at closing. In addition, there is a monthly premium of .5/12% of the current loan balance that is added to the interest rate. This increases the growth rate of both your loan balance, and any unused credit line that you have.

Q: Where can you go to find current reverse mortgage prices?

A: You are there, just click on Rates and Fees at the top of this page to see the prices on both fixed and adjustable-rate HECMs reported by 9 lenders each week. It also shows weekly historical figures beginning August 2, 2016.

Q: What happens if the value of my house goes down?

A: Nothing happens, the terms you received at the outset were based on the assumption that your house would appreciate by 4% a year, and that assumption is not changed. If your house value goes down, your loan balance when your HECM terminates will exceed the house value and FHA will take a loss. That loss is covered by the mortgage insurance premiums paid by all HECM borrowers.

Q: Can I shop for the best deal on a HECM reverse mortgage?

A: Only if you know exactly what you are shopping for, and where to go to find it. You are not shopping for rate and points, these are important only in affecting your objectives, which can be any of the following:

  • You want to increase your current and future monthly income as much as possible.
  • You want to increase your current and future monthly income, and maintain a reserve for special occasions or unanticipated needs.
  • You want to increase your income for a limited period until another income source, such as social security or a deferred annuity, kicks in.
  • You want to eliminate the monthly payment on an existing mortgage, and if there is anything left over, take it as a credit line on which you can draw at any time.
  • You want to eliminate the monthly payment on an existing mortgage, and if there is anything left over, take a monthly payment for as long as you live in the house.
  • You expect your income to decline after N years, perhaps because you terminate employment, and you want to increase your income permanently when that happens.
  • Your future income will cover basic needs, but you want access to funds for special purposes or occasions, such as travel, remodeling your home, or gifts to children.
  • You have no immediate financial needs but want to protect yourself against the risk of outliving your financial assets.
  • You want to access as much cash as possible right now to meet an immediate need, such as paying off short-term debt.
  • You want to purchase a home, perhaps with minimal asset liquidation.
  • You want to minimize the reverse mortgage debt on your home that will reduce the home equity realized by your heirs.

Shopping individual lenders for this information is very difficult because it is not on their web sites, direct contact is required, and each will attempt to sign you up as a customer. The alternative is to use my kosher reverse mortgage calculator, which does show the variables relevant to your objective, for each of the reverse mortgage lenders who deliver their price quotes to my site. None of them will contact you unless you contact them first.

See Shopping Effectively for a HECM Reverse Mortgage

Q: What happens if my house value appreciates by more than 4% a year?

A: Nothing happens with your current HECM, but you might find it advantageous to pay off that HECM, refinancing into a new one based on the higher current value. Advantageous means that you can draw more funds. Note that refinancing will reduce the equity in your home realized by your heirs because of the transaction costs that are financed into the new loan.

Different Uses to Which HECM Reverse Mortgages Can Be Put

Q: What are the different financial needs that a HECM might meet?

A: There are 5 as shown below:

Financial Needs

HECM Draw That Meets Need

1. Need a reserve for contingencies, including the possibility of outliving your money by living too long

Draw the largest possible initial or future credit line, with or without a cash draw.

2. Inadequate income, now and in the foreseeable future

Draw the largest possible monthly payment for as long as you live in the house.

3, Have an immediate need for cash for any purpose except buying a house.

Draw as much cash as possible, at closing or after 12 month

4. Need a reserve for contingencies and more current income

Draw a smaller monthly payment plus the largest possible credit line.

5. Purchase a house with the smallest possible cash outlay.

Draw as much cash as possible, at closing.

See HECM Reverse Mortgages: A Strategy For Seniors and
Purchasing a House With a HECM Reverse Mortgage: How to Do it Right

Q: How can a HECM reverse mortgage be used to hedge property value risk?

A: In drawing the largest amount possible, the HECM assumes the borrower’s home will appreciate by 4% a year. If it appreciates by less than that, the borrower gets a free ride, and if it appreciates by more, the borrower can refinance and draw more funds.

See How Senior Homeowners Can Hedge Property Value Risk.

Q: How does a senior use a HECM reverse mortgage to protect against retirement emergencies?

A: He takes a HECM credit line and sits on it until the emergency occurs.

See Preparing For Retirement Emergencies.

Q: How can a senior use a HECM reverse mortgage to make an advantageous delay in taking social security payments?

A: Seniors who expect to live past age 81/82 find it advantageous to delay taking social security until they reach 70, but insufficient income may force them to begin drawing a smaller amount earlier. If they own a home with some equity in it, however, they can take out a HECM reverse mortgage from which they would draw a monthly payment over the period until they reach 70. At that point, the HECM payment could stop as their social security payments begin.

See Delay Taking Social Security With a HECM Term Payment

Q: Can you refinance a HECM reverse mortgage?

A: Yes, but whether it would be advantageous depends on how much more you can draw relative to the incremental settlement costs of the new HECM. A rule of thumb is that the increase in the amount you can draw ought to be more than 5 times as large as the settlement costs.

See Can a HECM Be Refinanced?

Q: How do you choose between fixed and adjustable rate HECMs, and between different combinations of interest rate and origination fee?

A: You choose based on your objectives. If your objective is to draw the largest monthly payment for as long as you are in your house, for example, you select the adjustable rate HECM that provides the largest payment.

See Which HECM Reverse Mortgage Best Meets Your Needs?

Q: How can you use a HECM reverse mortgage to avoid outliving your money?

A: Draw a reverse mortgage line of credit, and let it sit unused until it is needed. While your financial assets are getting smaller, your credit line is getting larger. You draw on the line only if you are still alive when your assets are fully depleted, otherwise the equity in your house will pass to your estate.

See Senior Homeowners Can Reduce the Risk of Outliving Their Money.

Q: Will a senior benefit from converting a standard mortgage to a HECM reverse mortgage?

A: The senior’s wealth would decline because of HECM settlement costs, mortgage insurance and loss of the tax deduction on interest payments. On the other hand, consumption could be greater because of the elimination of the payment on the standard mortgage. It comes down to whether the senior is a wealth maximizer or a consumption maximizer.

See Transitioning From a Standard Mortgage to a Reverse Mortgage: A Bad Idea For Some, a Good Idea For Others.

Q: Is it a good idea to use a HECM reverse mortgage to repair a house you expect to sell shortly?

A: No, bad idea because the large upfront cost on a HECM makes it very costly when the period is short. You will do better with a HELOC.

See Use a Reverse Mortgage to Repair the House?

Q: Is it a good idea to use a HECM reverse mortgage to generate investment income?

A: For most seniors, it is a bad idea because the cost of funds, consisting of the interest rate, mortgage insurance premium and settlement costs would exceed the investment return. Possible exceptions are seniors with businesses that require capital, or with high-interest rate credit card debt that they want to pay off.

Q: Is it a good idea to use a HECM to supplement income pending a house sale?

A: For most seniors, a HELOC is a better tool for this purpose because the upfront costs are much lower. However, some seniors won’t qualify for a HELOC but will qualify for a HECM. If the senior is not completely sure she will want to sell, furthermore, the HECM is a safer choice because it does not have to be repaid if she stays put.

See Some Uses of HECMs.

Q: How does a HECM borrower protect a spouse too young to be a co-borrower?

A: A non-borrowing spouse (NBS) of a HECM borrower is already protected in having the right to remain in the house after the borrower dies. That is important protection but so long as the NBS  is less than 62, it doesn’t provide any accompanying revenue unless the borrower had made some provision for that purpose before dying. He may have left other assets to the survivor, or he could have drawn cash from the HECM and used it purchase a life annuity for the spouse.

However, when the NBS reaches 62, she could refinance the HECM in her own name, since presumably she would have inherited the home. The more equity the borrower had in the home when he died, the larger the amounts that would become available to the NBS turned HECM borrower on refinancing. Note that the HECM the NBS refinances is based on the current property value and the current loan balance, which includes the interest accruals since the death of the original borrower.

These options are discussed in Managing a HECM Reverse Mortgage When One Spouse Is Significantly Older Than the Other.

 

Decisions HECM Reverse Mortgage Borrowers Make

Q: What are the major decisions a HECM reverse mortgage borrower must make?

A: Some major decisions are as follows:

  • Deciding where to go/who to contact to begin the process.
  • Choosing between fixed-rate and adjustable rate HECMs.
  • Choosing between 0.5% and 2.5% mortgage insurance premiums.
  • Selecting payment options on an adjustable rate HECM.
  • Selecting from among alternative combinations of interest rate and *origination fees.
  • Taking a HECM now or later.

See The HECM Reverse Mortgage Decision Process.

Q: How do I know whether a fixed-rate or an adjustable rate HECM is better for me?

A: If you are looking to a HECM to provide funding during your retirement years, which is the major purpose of the program, you will take an adjustable rate because only adjustable rate HECMs can fund you in the future. On a fixed-rate HECM, you can draw funds only at closing. Borrowers take the maximum amount available and that ends it. They cannot draw any more, except possibly by refinancing, and that would work only if the value of their home appreciates substantially – by more than the 4% assumed by FHA in setting draw amounts.

See The Fixed-Rate Versus Adjustable-Rate Decision: Standard Versus HECM Reverse Mortgages

Q: How do I choose between HECMs that adjust the interest rate monthly, and those that adjust it annually?

A: HECMs on which the rate adjusts monthly have lower initial rates than those that adjust annually, but the monthly adjustable has a higher maximum rate. The maximum rate is 10% above the initial rate on HECMs that adjust monthly, and 5% above the initial rate on HECMs that adjust annually. The monthly adjusting HECM is a good choice for seniors looking for the largest possible credit line because the low initial rate generates a large initial line and a future explosion in market rates will accelerate the growth of unused lines.

Q: How do I choose the best combination of interest rate and origination fee?

A: It depends on your objective and your time horizon. If your objective is to leave as much equity to your estate as possible, for example, you will choose the combination that result in the smallest loan balance after a period that is your best guess of how long you will have the HECM. Alternatively, you might choose the combination that result in the largest credit line after some period.

See Confronting the Three HECM Reverse Mortgage Decisions.

Q: What is the most important mistake that seniors make with regard to their HECM draw options?

A: Perhaps the biggest mistake is drawing as much cash as possible at the closing table, leaving nothing for future use. To some degree, this mistake rests on a distrust of adjustable rate mortgages, carried over from the time they took out a standard mortgage to purchase their house. The senior who insists on taking a fixed-rate mortgage can only draw cash at closing; options to take a credit line or a monthly payment are available only on adjustable-rate HECMs.

This mistake is often encouraged by loan officers because larger cash draws result in larger initial loan amounts, which enhances the value of the HECM in the secondary market.

See Avoiding Mistakes In a Dysfunctional Market.

Q: What are the advantages and disadvantages of waiting before taking out a reverse mortgage?

A: Waiting results in a small but certain increase in draw amounts because the senior is older, and a potentially larger but less certain increase based on appreciation in house value. However, both of these effects can be swamped by a rise in interest rates, which reduces draw amounts. The best strategy for borrowers who have no current need for funds but anticipate that they will sometime in the future is to take a HECM credit line now and let it sit unused while it grows in size. That way, if market interest rates rise, the reduction in draw amounts will be at least partially offset by a rise in the unused credit line.

See Should You Take a Reverse Mortgage Now, or Would it be Better to Wait?

 

Getting the Best Possible Deal on a HECM Reverse Mortgage

Q: How can a borrower determine whether a price quoted by a reverse mortgage lender is competitive?

A: The best way is to use the professor’s kosher reverse mortgage calculator to compare the price quoted to you with those posted by the lenders reporting their prices to his site. The calculator allows you to compare prices on an identical transaction

See Avoiding Mistakes In a Dysfunctional Market.

Q: Where can you find competitive prices on HECM reverse mortgages?

A: The only source is a multi-lender web site, of which there is only one at www.mtgprofessor.com. Also, see Selecting the HECM Reverse Mortgage Lender Offering the Best Deal.

Q: What is the HECM Shoppers Assistant (HAS), and how can it be used?

A: The HSA is a one-page summary of all the information a lender who is being shopped needs to price a HECM accurately. It includes the required personal data about the borrower, desired type of HECM, desired draw amounts, and the price the borrower is looking to beat. The HSA is available only to those who deploy the kosher reverse mortgage calculator on my site to the end

See Shopping the HECM Reverse Mortgage Market: Another Look

Q: How do I find the HECM that promises to provide the largest credit line in 10 or 20 years?

A: You go to my kosher reverse mortgage calculator and at Step 1 on How You Plan to Use Your Reverse Mortgage, you check “Credit line.” After entering your transaction data at Step 2, you will be directed to Step 3 which shows initial and future credit lines over any period you specify, for both annual rate adjustment and monthly rate adjustment HECMs, for every lender on my site that is licensed in your state.

Q: Why is the HECM market dysfunctional?

A: Lenders operate by attracting potential borrowers into making contact with them, then collecting the information needed to entangle the prospect in a process that discourages them from looking elsewhere. Lenders disclose prices only after a senior discloses the property address, their email address and in some cases their social security number.

Except for my site, shopping lenders for the “best deal” is not possible because very few lenders post their prices for shoppers to see. Furthermore, even if lenders did post prices, very few borrowers would be able to use the information effectively.

Bottom line, very few prospective HECM borrowers contact more than one lender.

Q: Does the TALC disclosure help borrowers shop more effectively?

A: No, it is a completely useless measure that you can safely ignore.

See Can Government Help Borrowers Make Better Decisions? TALC is Typical

 

Managing a HECM After You Get It

Q: What are my responsibilities as a borrower going forward?

A: You are responsible to paying property taxes and homeowners insurance, and for maintaining the property.

Q: What options are available to HECM reverse mortgage borrowers during the years they have a HECM?

A: On fixed-rate HECMs, the only available option is to repay the loan balance. On adjustable-rate HECMs, there are multiple options:

  • The borrower with an unused credit line can draw on it at any time.
  • The borrower who pays down the loan balance increases the unused credit line dollar for dollar, and gets a tax deduction.
  • Borrowers with an unused credit line can convert it to a monthly payment.
  • Borrowers who have been drawing a monthly payment can cancel it, which will increase the unused credit line.

In addition to these changes within the existing HECM, the borrower might decide to scrap that HECM for a new one by refinancing. Borrowers refinance in order to increase the amounts they can draw.

See Can a HECM Be Refinanced?

Q: How do I know whether it is more advantageous to make a change in my existing HECM, or refinance?

A: You use our spreadsheet Assessing the Status of a HECM Reverse Mortgage, and Opportunities to Modify it or Refinance it.

The spreadsheet allows you to compare the existing HECM with a modified HECM, and a modified HECM with a refinanced HECM.

Q: How much hassle is involved in modifying the terms of an existing HECM when the circumstances of the borrower change?

A: Very little hassle. You make a change in the existing HECM by telling your servicer what you want to do, and paying $20 for the trouble. To refinance, of course, you must re-enter the market, preferably to obtain a new kosher HECM.

See Keeping Tabs on a HECM Reverse Mortgage: A New Tool For Seniors.

Q: What happens if you die with a reverse mortgage, does the mortgage company foreclose and take the house?

A: The only situation where the lender would foreclose would be when the borrower’s estate walks away from the transaction, which can happen if the house is worth less than the loan balance. This seldom occurs.  If the heirs want the house, they can get it by paying off the loan balance, or by paying 95% of the current appraised value less expenses, whichever is less. If there is equity in the house but the heirs don’t want it, they have 6 months, extendable to 12 months, to sell it. In such event, the estate would retain the net equity.

 

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