What is a Reverse Mortgage?
A reverse mortgage is designed to allow seniors to draw on the equity in their homes, converting their home equity into cash.
With a regular conventional mortgage, you make payments to the lender. With a reverse mortgage, the lender makes payments to you.
There are three different options for receiving your cash. A homeowner can receive a lump sum, monthly payments from the mortgage company, or a line of credit that can be drawn on at the homeowner’s option. If the monthly payments option is chosen, the homeowner can choose to receive payments for a fixed period of time (a “term” payment plan) or as long as one borrower lives and continues to occupy the property as a principal residence (a “tenure” payment plan).
Additionally, payment plans can be combined. For example, a borrower could choose to combine a line of credit with a term payment plan or with a tenure payment plan.
The funds from a reverse mortgage can be used for any purpose the homeowner desires, but all other mortgages on the home must be paid off first.
Interest accrues on the mortgage balance, which increases as each payment is made to the homeowner or when a draw is made on a line of credit. The reverse mortgage continues until the borrower sells the home, dies, or ceases to use the home as a primary residence. No payments are made by the homeowner until the mortgage terminates and the house is sold (or refinanced by the homeowner or the homeowner’s heirs/estate).
The amount you owe on a reverse mortgage can never exceed the value of your home. This means that when the home is sold, neither you nor your estate would be required to make up any difference if the house sells for less than the amount owed on the mortgage. Additionally, if the house sells for more than the mortgage balance, you or your estate will receive the excess funds.
What is a HECM Reverse Mortgage?
HECM stands for Home Equity Conversion Mortgage. A HECM reverse mortgage is a reverse mortgage made by a lender or bank, insured by the Federal Housing Administration (FHA).