A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a type of loan that allows older homeowners (62 or older) to convert part of the equity in their homes into tax-free income.  Reverse mortgages are wonderful financial tools for certain individuals; however, it is a very important financial decision.  If you are considering a reverse mortgage the first step is to talk with a reverse mortgage counselor.

If you are interested in a Home Equity Conversion Mortgage (HECM), you can prepare for your appointment by checking to see if you are eligible.

There are many factors to consider before deciding whether a reverse mortgage loan is right for you. Our guide below will describe just how a reverse mortgage loan works and will outline the steps needed to access your home’s equity.

To assist in the process of determining your eligibility and whether a reverse mortgage loan is the right choice, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a reverse mortgage loan and repaying the loan.

Counselors will also discuss provisions for the mortgage becoming due and payable.  Upon the completion of reverse mortgage counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs.

There are borrower and property eligibility requirements that must be met to qualify for a reverse mortgage loan.  If you meet the eligibility criteria, you can complete a reverse mortgage application by contacting an FHA-approved lender.  The lender will discuss the HECM program requirements, the loan approval process, and repayment terms.

The amount of money you can receive is based on the age of the youngest borrower, prevailing interest rates and the lesser of the appraised value of the home, sale price or maximum lending limit. No monthly mortgage payments are required.

However, the borrower must continue to pay taxes and insurance and maintain the home according to FHA guidelines. Interest and fees are added to the principal balance each month, resulting in a rising loan balance over time.

Borrowers may remain in the home indefinitely, even if the loan balance becomes greater than the value of the home – so long as the borrower meets the loan obligations.

Because HECM’s are non-recourse loans, you or your heirs will never owe more than the lesser of the value of the home or the loan balance, provided the home is sold to repay the loan.

Borrowers pay a mortgage insurance premium (MIP) which protects the borrower by ensuring they continue to receive their payments in the event the lender becomes insolvent.

The AARP also suggests you ask yourself the following questions:

• Do you really need a reverse mortgage?
• Can you afford a reverse mortgage?
• Can you afford to start using up your home equity now?
• Do you have less costly options?
• Do you fully understand how these loans work?

CHES, Inc. is independent of any lender and does not provide Reverse Mortgage Loans directly.

This Web site includes links to several useful consumer guides and provides detailed answers to common questions about reverse mortgages. More…

A Web site devoted to elder issues with useful consumer guides.  The National Council on Aging also offers a Web-based “Benefits Checkup” that helps seniors with limited income and resources find benefits programs that help with prescription drug costs, rent, energy bills, food, and more. More…

The American Association of Retired Persons’ (AARP) Web page includes links to obtain their comprehensive consumer guide “Home Made Money.” More…

The U.S. Department of Housing and Urban Development (HUD) Web page provides basic information about reverse mortgages and a list of HUD-approved lenders. More…

Lenders are not in the business of owning homes — they wish to make loans and earn interest. The homeowner keeps the title to the home in their name. What the lender does is add a lien onto the title so that the lender can guarantee that it will eventually get paid back the money it lends.

The estate inherits the home as usual but there will be a lien on the title. The lien is whatever proceeds were received from the reverse mortgage plus accrued interest.

For example, let’s assume someone takes out a reverse mortgage and owes $50,000 after 5 years. Then the homeowner passes away and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.

A reverse mortgage is a “non-recourse” loan which means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.  Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.

The HECM reverse mortgage was created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be evicted or foreclosed on for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay the property taxes.

The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.

Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage in one month to ensure they do not exceed the Medicaid limits. You should consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.

The proceeds from a reverse mortgage are not considered income and are not taxable. Furthermore, the interest on reverse mortgage can be tax deductible when it is repaid. Consult a tax advisor for more information.

Typically The majority of lender closing costs and fees can be financed into the reverse mortgage loan.

The only similarity between a reverse mortgage and a home equity loan is that both use the home’s equity as collateral.

• Any homeowner can apply for a home equity loan. A homeowner must be at least age 62 to be eligible for a reverse mortgage.
• A home equity loan must be repaid in monthly payments over 5 or 10 years. A reverse mortgage is typically not paid back until the homeowner moves out of the property for 12 consecutive months or passes away.
• A home equity loan requires stable income and a solid credit score. A reverse mortgage does not consider a minimum income or credit score.
• A home equity loan that charges no closing costs may have a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but generally has lower interest over the course of the loan.