FHA Reverse Mortgage Loans: Researching Features and Benefits

by Karen Lawson
December 28th, 2009
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An FHA reverse mortgage loan, also known as a Home Equity Conversion Mortgage (HECM), can provide cash for living expenses, home improvements, and other needs. Before getting a reverse mortgage loan, it’s important to understand how these loans work.

Reverse mortgage loans are designed to provide homeowners aged 62 and above with cash flow derived from home equity. These home loans are considered “reverse” because payments are made from the mortgage lender to the borrower: a reverse mortgage draws upon the borrower’s home equity to create the cash flow. An FHA-insured reverse mortgage loan–known as a Home Equity Conversion Mortgage, or HECM–can offer eligible homeowners financial flexibility. But reverse mortgage loans can also carry some degree of risk if borrowers don’t understand how these loans work.

Eight Basics About FHA HECMs

  • Unlike other FHA home loans, reverse mortgage loans are only available to qualified homeowners age 62 and above.
  • FHA reverse mortgages are available to homeowners even if you didn’t buy your home with an FHA-insured loan.
  • Reverse mortgages require homeowners to have sufficient home equity for paying off existing home loans and providing funds for meeting borrowers’ cash flow needs.
  • Borrowers may choose how they wish to receive proceeds from a reverse mortgage: as a lump sum, in periodic payments, as a line of credit, or a combination of these options.
  • Reverse mortgage home loans incur interest and mortgage lender charges as funds are drawn out. These costs do not have to be repaid until one of several circumstances–sometimes called a “maturity event”–occurs. Borrowers are not required to make payments until they sell or otherwise vacate their home. Failure to pay property taxes and insurance or allowing the home’s condition to deteriorate can also cause mortgage lenders to “call” a reverse mortgage loan due and payable.
  • FHA reverse mortgage loans may be represented as a government benefit. This is not true. FHA, a federal government agency, insures mortgage lenders against losses caused by borrowers’ failure to honor the terms of their reverse mortgage loan, but borrowers do not gain government benefits.
  • Reverse mortgage loans require up-front costs. Borrowers are required to pay for mortgage insurance, lender fees, origination costs, and other charges that may not be incurred with a home equity line of credit or other financing options. It’s important to know what a reverse mortgage will cost before finalizing your home loan.
  • Depleting home equity with a reverse mortgage can cause your estate to diminish or disappear; make sure you fully understand potential consequences of a reverse mortgage to your estate and heirs.

Unscrupulous vendors may try to sell unneeded financial products in connection with your reverse mortgage; this may be fraudulent or unethical. Be wary of unsolicited offers of financial services and products. Used properly and issued by reputable lenders, FHA reverse mortgage loans can provide needed funds and eliminate monthly mortgage payments, but borrowers can be subject to fraud and misleading information if they don’t understand the full consequences of the loan.

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This entry was posted on Monday, December 28th, 2009 at 1:02 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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