A HECM reverse mortgage is the most popular program, with more than 90% of seniors opting for it over the other two programs; Home Keeper and Jumbo. But it isn’t perfect; there are both pros and cons with this program and potential borrowers should be aware of them before they make any final decision about taking one out on their home.
These types of mortgages are only available to borrowers who are 62 years of age or older, who completely own outright their home (or have very little mortgage) and who live in certain types of home.
Unlike regular mortgages where monthly payments are required to pay back the principal amount plus interest, there are no such monthly repayments. With a regular mortgage you risk losing your home if you do not keep up with repayments; however, with a reverse mortgage there are no monthly repayments so you don’t risk losing your home. In fact, title deeds stay in the hands of the borrower and never the lender. Unlike a regular mortgage where equity is put back into the home with each repayment; equity is taken out of the home with each payment made to the borrower.
Of all programs currently on offer the HECM is the most popular. Here are some advantages and disadvantages of the program.
Its biggest plus is that the program is federally insured. The US government guarantees that the borrower will receive every penny they’re entitled to, no matter what. If the lender goes bust or there is insufficient equity in the home to pay the borrower, the government guarantees to pick up the tab.
Most upfront fees and charges are capped, so no matter what broker is used, the borrower can rest assured the fees and charges they must pay are fair and follow government guidelines.
There are 5 different payment options. Fixed payments are made for as long as the borrower lives in the home. Fixed payments are made for a fixed period of time. The borrower can elect for a line of credit choosing to withdraw any amount at any time until the line of credit is exhausted (not available in Texas). A combination of line of credit with fixed monthly payments for as long as the borrower lives in the home. Or, a combination of line of credit with fixed payments over a specified number of months.
The payments are tax free and don’t affect Social Security or Medicare benefits.
There is a ceiling on the amount that can be borrowed. It depends on where the property is located and currently varies from $200,160 to $362,790. The Home Keeper program has a higher ceiling and a Jump program has no ceiling at all.
The upfront costs can be high as there is a Mortgage Insurance Premium that must be paid to guarantee the loan. This is 2% of the value of the home. There is also an ongoing annual premium of 0.5% of the home’s value. This can be an issue if the loan is paid back early.
Seniors who receive SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California) can find that these are reduced if they don’t spend their entire loan amount each month.
The above are some of the more important considerations, there are others. Before choosing a HECM reverse mortgage or other program you should first seek advice from an independent financial advisor.