The idea of HECM reverse mortgages is very appealing to seniors who want to pay off medical or credit card debt, pay off a mortgage, perhaps buy a new home or even to simply have the funds available to be able to enjoy their retirement on their own terms.
These reverse mortgages, which are regulated by the FHA, are a simple way for seniors to access the equity they have built up in their home without the need to take out a home equity loan. Unlike a home equity loan, the reverse mortgage doesn’t require any payments on the principal or interest until specific criteria are met.
Knowing the criteria and understanding the repayment process is important and allows seniors to determine if this is the right option for their financial needs.
Conditions to Start Repayment
As long as one of the borrowers on HECM reverse mortgages is living in the home there is no requirement for repayment to the lender, provided all other terms of the agreement are met.
These terms include ensuring all property taxes, homeowner association dues and all homeowner insurance is paid and current. Additionally, the home must be maintained as the primary residence and must be kept in reasonable condition and repaired as needed to retain the value of the home.
The repayments will start if the above conditions are not met or if:
* borrower has not lived in the home for 12 consecutive months,
* the house is sold, or
* the last surviving borrower dies.
When the loan repayments are triggered, the borrower or the heirs have options for repayment. Individuals may choose to sell the home, with the lender then collecting for the principal and accrued interest, and the individual or the heirs then receiving the balance of the sale of the home.
Keep in mind that all HECM reverse mortgages are considered non-recourse loans. This means that the borrower, or the heirs, will never repay more than the fair market value of the home. This is covered by a small insurance cost you pay as part of the fees to protect yourself or your heirs if property values suddenly drop.
It is also possible to the borrower or to the heirs to pay off the principal and interest with cash savings or even taking out a traditional mortgage on the property. This is very common when heirs want to keep the home and have the ability to qualify for a traditional mortgage.
Understanding the repayment process for HECM reverse mortgages is an important part of the decision-making process. At Longbridge Financial, we will work to ensure you understand the process.