Reverse mortgages are a common means of income the elderly people need to survive under (Home Equity Conversion Mortgage) HECM Program. Reverse mortgages are losing its popularity but it is still a very useful program introduced by FHA (Federal Housing Administration) United States in 1965. HECM program enables the elderly Americans to survive in their terminal age with sufficient cash to look after themselves in terms of medicines. , groceries, payment of utility bills, clearance of taxes and other dues etc. HECM program asks you to let your home be taken over by the FHA, banks or other FHA approved lenders if the owner dies, sells the house or moves out permanently and is unable to pay back the loan. The heirs of such elderly people who opt for HECM program get their elders’ house back if they can pay back the loan with all interest and other fee charges. So the question is; Is HECM program a good option?
Difference between mortgages and reverse mortgages
Mostly we are familiar with the term mortgage that is a way of getting cash against some property (both moveable and immoveable) from a lender. The borrowed cash obtained from the mortgaged property is returned in monthly installments with its interest to the lenders who are mostly bankers or some finance companies. Whereas, reverse mortgage is the income for the senior citizens, equal to the equity of their home. In the case of reverse mortgages, the lenders are the finance companies and banks approved by FHA. The amount is paid to the borrower in lump sum, or in monthly installments, or online of credit and retains his home during his lifetime.
Who are eligible for reverse mortgages?
All 62 years and above are eligible provided the borrower owns the house.
Conditions for loan limits of reverse mortgages
The limit of loan admissible to the borrower under this scheme depends upon the age of borrower and condition of the house itself. The conditions of borrowing in reverse mortgages also depend on the current rate of interest, FHA Mortgage value of the area and initial mortgage insurance premium (MIP); with two options ie 2% standard HECM option or 0.01% HECM saver option.
Analysis of reverse mortgages through HECM program
- Payments can be arranged as per the desire of the borrower ie lump sum, online credit or monthly installments.
- Homeowner or the borrower does not make any monthly payments.
- Monthly payments are due from the house owner when he or she dies, moves out permanently, the house is in a depleted state, or the owner is away for continuous 12 months. Beside that if, the owner sells the house. In all these cases, the loan is due in full with interest and fees.
- Irrespective of the rate of interest and monthly installments paid, the owner, the borrower, or the heirs will not pay more than the actual price of the home.
- The homeowner will continue to get the monthly installments if he or she lives for a period that is beyond the actual price of the house provided the owner uses the house as the primary residence.
- It does not require any credit scores or income to qualify for this loan.
- The loan is not taxable.
- Under the HUD approved mortgage terms, the owner of the house cannot be forced to leave or vacate the house.
- Left over portion of the online credit gets the same rate of interest that is on the reverse mortgage itself.
- Owners of the houses dependent on Medicaid or other state or federal programs must consider if they are eligible for this loan.
- This program is quite costly on its closing. Origination fee is double (from $5000 to $8000) that of the other conventional mortgages and mortgage insurance. However, the interest rates are adjustable.
- Being complex loans and as a protection measure for the consumer, the owner or the senior is required to attend independent counselor of the HUD (The United States Department of Housing and Urban Development).
- The borrowers continue to pay the real estate taxes, home repairs, insurance with added burden for paying mortgage insurance. In case of failure, the borrower may be asked to pay back the loan earlier.
- Living cost is not adjusted in the event of inflation to protect the borrower.
- The loan given in the form of monthly installment is added to the loan and a compound interest is given on it at the end.
- The interest falls on the heir or the state when it is to be paid back.
Mortgages and reverse mortgages are related to bad financial planning. However, reverse mortgages are for elderly people or senior citizens who are unable to earn a living for themselves. As many of the writers, analysts and critics are of the view that the option of reverse mortgage should be the last resort to be opted for. The senior citizens are forced to adopt this option by compulsion, as they have no other choice. Thus, seeing the strengths and weaknesses of the program, it is up to the reader to weigh whether reverse mortgage is a good option or not.