FHA’s Reverse Mortgage Loan aka Home Equity Conversion Mortgage (HECM)
The FHA reverse mortgage is a mortgage loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. This is done by taking any combination of lump sum, monthly payments, and/or line of credit, but the amount and size of any of those options is based on the equity of the home and the age of the borrower(s) or non-borrowing spouse (NBS). The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care.
The loan is called a reverse mortgage because instead of making monthly payments to a lender by taking money out of your pocket and sending it to the lender, as with a traditional mortgage, the lender makes payments to the borrower. Once All payments have been paid out, or funds are left in the line of credit, the borrower(s) and/or NBS can live in the home until the younger of the borrowers or NBS turns 150 years old. At that point, the lender can kick you out of the home, hahaha. No seriously, that is the date in the closing documents. In other words, you can live in the home the rest of your life, while deferring interest to be paid at some later date. Don’t worry, your heirs still inherit the property and have up to 1 year to sell, refinance, or somehow pay off the reverse mortgage and keep the profits for themselves. Yes, you can sell your home and pay off the reverse mortgage at any time.
This does NOT mean you can forgo your obligations of paying the property taxes, homeowner’s insurance, flood insurance, homeowner’s association dues, etc. if those are applicable to you. Property taxes and insurance are mandatory for all properties with a reverse mortgage, so if you don’t pay those, then you can fall into foreclosure for non-payment of property charges.
* This material is not from HUD or FHA and has not been approved by HUD or a government agency.