The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.
You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
HECM counselors will discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM. They will also discuss provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your needs. You can search online for a HECM counselor.
Borrowers can choose a fixed rate or an adjustable rate and fixed rates sound great, but they are what is called a “closed end instrument” and require the borrower to take the entire loan at the very beginning of the transaction.
For borrowers who are paying off an existing mortgage and need all their funds to pay off the current loan, this is no problem. For a borrower who has no current lien on their property or a very small one, this would mean that they would be forced to take the entire eligible mortgage amount on the day the loan funds.
This might give a borrower $200,000, $300,000 or more in cash from the very first day that they do not need at the time and on which they are accruing interest. This can also have an adverse affect on some seniors with needs-based programs.
Seniors on Medicaid and some other needs-based programs would impact their eligibility by having the sudden addition of the liquid assets and the senior would wind up funding their own Medicaid with the equity in their home.
For these seniors, a careful consultation with family members and a financial counselor is advised to be certain that they chose an option such as the line of credit where funds can be made available to them during times of need, but they never have excess funds sitting in accounts to affect their eligibility.
A borrower who is planning on using only a portion of their funds monthly need not pay interest on the entire amount from the very start, eroding the equity unnecessarily fast. An adjustable rate will accrue interest at a much lower rate at today’s rates, but has a 10% cap and can go much higher if rates rise in the future. However, the adjust rate program allows for more options for borrowers to receive their money.
They can choose a lump sum; a line of credit against which they can draw at any time and which cannot be frozen like many of the bank Home Equity Lines of Credit (HELOC’s) are going through now and which grows on the unused portion annually; a monthly payment for a set term or for life; or a combination of all of the options. The adjustable rates are currently much more flexible to meet borrowers’ needs.
One of the things that can determine the amount for which borrowers will ultimately qualify is the rate at which the loan accrues interest. When the margins on the adjustable rates were lower and the fixed rate was higher, the adjustable rates gave borrowers more money in their pockets in the form of eligibility.
Now, most borrowers we run through the reverse mortgage calculator receive more money on the fixed rate program. This is extremely important to know if you are trying to get as much as possible to pay off an existing lien. It also means that the higher the margin, the less money the borrower will receive and the faster interest on the loan will accrue.
So the thing to look for in a reverse mortgage here is definitely the rate on a fixed rate or the margin on an adjustable rate that is being quoted.
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