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Description of HECM Reverse Mortgage Program

Description of HECM Reverse Mortgage Program

A HECM reverse mortgage enables home owners of 62 or older to borrow against the equity in their homes, with no obligation to repay so long as they live in the home, with multiple options for drawing funds, and with payments guaranteed by the Federal Housing Administration (FHA). Here are additional details:

Eligibility: Borrowers must be 62 or older, they must own and occupy the mortgaged house as their permanent residence, and the house must be single family, in a 2-to4 family structure, in an FHA-approved condominium, or an approved manufactured home.

Cash Withdrawal Options: The senior may draw cash at closing, retain an unused credit line that grows over time and can be drawn on at the senior’s discretion, receive a monthly “tenure” annuity for as long as they live in the house, receive a term annuity for a period specified by the senior, or combine several of these options.

Mortgage Types: HECMs may be fixed-rate or adjustable rate, but fixed rate HECMs are available only for cash withdrawals. Both fixed and adjustable-rate HECMs come in standard and saver variants, with the saver carrying a lower insurance premium but offering smaller cash draws.

Mortgage Insurance Requirements: Borrowers pay FHA an upfront premium equal to 2% of property value on standard HECMs, and .01% on saver HECMs. Typically, the premium is financed along with other upfront costs, such as title insurance and recording fees. Borrowers also pay a monthly premium on all HECMs equal to 1.25%/12, which is an add-on to the interest due. The premiums compensate FHA for the HECM risks it assumes.

Risk Borne by FHA: FHA assumes two major reverse mortgage risks. One is that the lender obligated to make payments to the senior is unable to do so for any reason. The second is that the property value at time of termination does not cover the outstanding debt.

Equity in the Property: The debt that grows with a HECM must be paid when the borrower dies, moves out permanently, or elects to pay it off voluntarily. Any equity remaining belongs to the borrower or the borrower’s estate. If the debt exceeds the property value, FHA bears the loss, not the borrower or the borrower’s estate.

Borrowers’ Obligations: They must live in the house so long as the HECM remains in force, they must pay their property taxes and homeowners insurance, and they must maintain the property. These are obligations a homeowner has whether they take a HECM or not.

Risk Borne by the Borrower and Co-Residents: The borrower who fails to pay property taxes or homeowners insurance is in default and could lose the house to foreclosure. If the borrower shares the house with another person who is not a party to the HECM contract, such as a young spouse not eligible for a HECM, that person will be obliged to leave the house on the borrower’s death. If there are family members who want to keep the house after the borrower’s death, they must pay off the HECM balance even if it exceeds the property value.

HECM Saver Option: All HECMs offer a Saver version designed for borrowers with short time horizons who want to minimize the loss of equity in their home. The initial mortgage insurance premium on a Saver is reduced from 2% of home value to 0.1%, while the maximum amount that can be drawn is reduced by 15-20%, depending on the borrower’s age. The Saver is a useful option for owners who intend to sell their home in a year or two and pay off the HECM with the proceeds. It will be bypassed by owners who expect to remain in their homes and want to extract as much from it as possible.