Pros and Cons of a Reverse Mortgage

A reverse mortgage is a loan that you can apply against the equity in your home. It enables a qualified older homeowner to withdrawal part of equity in their home. The equity can be withdrawn and paid to the homeowner in a lump sum or in monthly payments to help supplement their income. The Housing and Urban Development (HUD) agency insures the most common reverse mortgage program through the Federal Housing Administration (FHA). The FHA reverse mortgage is named the Home Equity Conversion Mortgage (HECM). The HECM does not require homeowners to repay the reverse mortgage, unless they no longer occupy the house, become delinquent on the property taxes or home insurance, or they fail to meet the obligations of the mortgage.

The eligibility qualifications for the HECM are very simple. The homeowner must be at least 62 years old and have an acceptable equity position in their primary residence. The primary residence includes any FHA approved property: single family residence, multi-family 2 to 4 unit dwelling (one unit occupied by home owner), HUD approved condominiums, or manufactured homes. There are no income or credit requirements for this mortgage program. Eligible homeowners must also complete counseling with a HUD approved and accredited reverse mortgage counselor. The counselor would review all aspects of the reverse mortgage program and how this mortgage type will specifically help the homeowner(s) based on their equity position. The mortgage typically does not have to be repaid until the last surviving homeowner moves out of the property. If the homeowner does not maintain the property as their primary residence for a 12 month period, the mortgage will be due.

The maximum mortgaged amount is calculated from the appraised value of the property, homeowner(s) age (youngest homeowner), interest rate (fixed or variable), equity position, and FHA lending limit for the county the home is located in. These factors will determine how much equity is available to the homeowner(s) to receive in a lump sum, equal monthly payments for as long as the homeowner lives in the home, line of credit, or monthly payments over a set period of time.

Homeowners retain ownership of their property and are not required to make any monthly payments. Even if the value of the home decreases, the homeowner is not held liable because a reverse mortgage has a non-recourse provision. This means that HUD and the lender share the risk on the future value of the house, not the homeowner. Although, HUD does require the home to be maintained in acceptable condition to retain its value.

Reverse mortgages have minimal fees for qualification, processing, and approval. These costs can vary by lender. Service fees may also be charged to homeowners who choose their equity to be paid to them in monthly payments. For additional information on the reserve mortgage program, please contact a local HUD approved lender.

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