25 Sep 2017
We recently sat down with Alice Tseng, a licensed loan originator who works exclusively with the Home Equity Conversion Mortgage (HECM) program, to address some ongoing concerns about reverse mortgages.
First, what exactly is a reverse mortgage?
AT: A reverse mortgage, also known as a HECM, allows homeowners age 62 and older to convert some of their home equity into cash.
Does the borrower still own their home – many people believe that with a reverse mortgage, the bank becomes the owner.
AT: The borrower most definitely continues to own their home. It’s a mortgage like all your traditional mortgages. In fact, it complies with even more stringent mortgage laws.
How does a HECM differ from a home equity loan?
AT: HECMs have different income and credit qualification rules that most seniors can work with; they don’t require any monthly interest payments or repayments, and do not expire in 10 years when the borrowed amount rolls into a fully amortized payment schedule.
How much can be borrowed against the home?
AT: Depending on the borrower’s age, the loan can be 50% to 70% of the appraised value (capped at $636,150): the older the borrower, the higher the percentage.
What can the money be used for?
AT: For anything you choose: to supplement your monthly income; pay for home repairs or renovations; medical expenses; consolidate credit card balances; help children with education expenses… but, if there is an existing mortgage, that needs to be paid off first and there needs to be enough loan proceeds to cover the mortgage. And if there’s a dip in the market, instead of cashing out on stocks when they are at a low, borrowers can use the reverse mortgage monies in lieu of tapping into their investments.
What about home healthcare expenses? We know Medicare doesn’t cover that in the long term – can a reverse mortgage help with these costs?
AT: Definitely. Borrowers can take out a reverse mortgage for care expenses and not even tap into that money until – or if – it’s needed. While the line is unused, it is growing automatically so your safety net is expanding. For people who cannot quality for long-term care insurance or who don’t have enough, a HECM is a great solution.
What if a borrower comes in to some money. Can they pay off their reverse mortgage?
AT: Yes!. And there are no prepayment penalties. They may also be able to take some tax deductions on the paid interest.
On June 25, the NY Times published an article referencing reverse mortgages. They suggested that the bank takes people’s homes [who have a HECM mortgage] when they die. Is that the case?
AT: NO! When the last surviving borrower no longer resides in the home, repayment will be required. Most often, there is still equity in the home that will be realized when the home is sold since only a portion of the equity was used for the reverse mortgage. So there is usually still money that goes to the estate if the borrower passes away. Even trusted news sources can get it wrong sometimes.
Isn’t Tom Selleck the spokesperson for your company American Advisors Group?
AT: Yes… but I haven’t met him yet!