What the Heck is a HECM?

There are four ways a homeowner can get needed cash out of their property.  Sell the property/home, refinance it, get a bank-issued line of credit, or sign up for a reverse mortgage.  A reverse mortgage (Home Equity Conversion Mortgage – HECM) is different from a regular mortgage in that the bank makes monthly payments to the homeowner instead of the other way around.  A reverse mortgage helps homeowners remain in their homes and keep the title without making mortgage payments.

Because of the COVID-19 pandemic, over 30 million Americans are out of work and investigating ways to supplement their diminished income, pay debts, or just carry on.  Recently, the FHA (Federal Housing Authority) reported applications for reverse mortgages are at a higher level than at any other time in history.  

Some financial counselors believe that a reverse mortgage should be one of the very last choices for a homeowner to generate cash.  Yet, other financial experts suggest their use as a wealth planning tool.  If you are considering a reverse mortgage, several requirements need to be met before a loan is approved.

• One of the borrowers must be 62 years or older
• The property must be the primary residence
• The property must be in good repair or able to be fixed
• The borrower cannot have any delinquent federal debt (i.e., overdue income taxes)
• All-State/County  property taxes must be current and applicable insurance paid
• The borrower must meet (in person or by phone) with a non-profit, independent FHA-approved counselor to go over the pros and cons of this type of loan
• As with a first mortgage, there are costs (points, taxes, recording fees, appraisal fees, and more) that must be paid upon closing, though most of these can be paid from loan proceeds
• The borrower must demonstrate they have the cash flow to pay their property tax, property insurance, and any homeowner dues for the duration of the loan
• Any outstanding mortgage must be paid from the reverse mortgage proceeds at closing 

There are three primary reasons that people get a Reverse Mortgage.

1. To pay off an existing mortgage, thereby eliminating the monthly mortgage payment and giving the borrower more cash to spend in other ways.
2. To build a line of credit that increases each month, and that cannot be canceled (a “rainy day fund”).  In this instance, the Reverse Mortgage becomes an important financial planning tool.
3. To help pay for their next home. About 7% of Seniors move each year (to downsize, be closer to relatives, be in an area with a lower cost of living, etc.). A Reverse Mortgage can contribute a significant portion of the purchase price.

The first reverse mortgage was created by Deering Savings and Loan in 1961.  Mrs. Nellie Young was recently widowed and without her husband’s income would not have been able to make the mortgage payments or continue to stay in her home. The bank noted that she had a lot of equity in the property and suggested using that to justify making a monthly payment to her. Moreover,  the debt would be settled when she died or if she sold the home. This agreement allowed the new widow to remain in her home, eliminate the home payment burden, and keep equity in the property.  In 1990, the United States Government saw the value of this program and gave the FHA the responsibility of administering their reverse mortgage program.  Today over 90% of all reverse mortgages are insured by the FHA.  The remainder are issued by private financial institutions (usually when the appraised home values are above $900,000).  The private lenders generally adhere to U.S. regulations when granting their loans.

A reverse mortgage is not, however, free money.  As with all mortgage loans, interest is charged and accumulates for as long as the mortgage is not paid off.  Loans are normally paid off when the heirs sell the property upon the borrower or surviving spouse’s death.  Once the mortgage is paid off, the heirs keep any equity greater than the mortgage balance.  If the loan balance is greater than the equity, the heirs are not liable for the shortfall.  This is because all reverse mortgages must have an MIP (Mortgage Insurance Premium) which guarantees the loan to the lender.  For the FHA the US Housing and Urban Development agency (HUD) collects a monthly insurance premium from the borrower and insures the loan against default.

The amount the borrower may get from the loan is based on a percentage of the property’s appraised value, the borrower’s age, and prevailing mortgage interest rates.

According to HUD rules, a borrower may get from 25% to nearly 73% of the appraised property value for a loan based on their age as shown below…

This article is designed to introduce the reverse mortgage solution to readers and to present its main features.  It is not all-inclusive, and as in all major decisions affecting an individual’s financial wellbeing, a financial counselor and tax expert should be consulted before deciding to get an HECM.  How a reverse mortgage is calculated and how interest rates (at this writing at record lows) are charged to the loan is complex and it is prudent to contact an expert in the field.  Two such experts are long-time Rio Vista resident, Edwin Okamura, of Bayview Residential brokerage – (408) 298-2591, and Larry Thompson, who has specialized in reverse mortgages since 2003.  Larry offers a free consultation to answer your questions and help determine how much you are qualified to borrow. You may reach him by phone at (408) 370-3606 or by email: skitravis@aol.com.