Ask the Expert

I’ve been hearing a lot lately about reverse mortgages. What exactly is a reverse mortgage and how does it work?

In the most simplistic of terms, it’s almost exactly what it says: a mortgage set up in “reverse”. Also known as HECMs (Home Equity Conversion Mortgages) are home loans made to individuals age 62, or older, whereby they can tap into the accumulated equity built up over time in their home. Many retirees, today, find it financially burdensome to live on a fixed income and pinch pennies from Social Security check to Social Security check, every month, to pay utility bills, cover the cost of groceries and medications, much less have anything left over. Yet, many of these same retirees own homes valued in the hundreds of thousands of dollars that they never plan, or want, to sell. In years gone by, unless they sold the property, there was no way to get any equity out of it without incurring a mortgage which would just mean yet another monthly payment to deal with. Then along came the idea of the reverse mortgage.

Nearly 85% of all reverse mortgages are the HUD guaranteed version, know as HECMs, although Fannie Mae offers a program known as “Home Saver” and some larger lenders offer their own version of basically the same product. How it works is, a participating reverse mortgage lender will have a high level meeting or even just a telephone discussion with a potential applicant to uncover an approximation of what the applicant might be able to receive in equity from their home. In order to be eligible, the youngest borrower must have reached age 62. Based on their ages, the estimated value of the property and a life expectancy formula that the lender has in a software program, they will offer several various proposals on what the annuity value of the HECM is. Payments can be made to the borrower in a monthly amount over a pre-determined time frame of choice, based on an estimated payment calculated from life expectancy, known as the “tenured payment structure”, or even as an available line of credit to be used only as needed by the borrower. It can even be broken up into a combination of monthly income, or annuity, and an additional available line of credit. Most applicants opt for the monthly, or tenured, payment as that’s the choice that generates additional monthly cash flow, which is what most applicants are interested in.

The nice part is that there is no need for the borrower to make any payments; the mortgage is designed to pay them. Hence the name “reverse” mortgage. As long as they remain living in the home, pay their property taxes and maintain hazard insurance on the property, as well as maintain the upkeep of the property, there is no repayment required. The loan must be repaid if the borrowers pass away, move out (for at least 12 consecutive months) so that the property is no longer their primary residence, or they sell the property. In addition, prior to completing a HECM loan application, the borrowers are required to be counseled by an independent , certified HECM counselor who will go over all the details and explain the program in depth so that applicants understand how, and if, the product is right for them. There is more information available on HECMs at various web sites including the U.S. Department of Housing and Urban Development and the American Association of Retired Persons.

Barbara Cunningham

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