Everything a homeowner 62 or older should understand before taking the next step.
Your name stays on the deed. A HECM is an FHA-insured mortgage, not a sale. HECMs are non-recourse, so you can never owe more than the home is worth, and your heirs keep any remaining equity. You keep paying property taxes, homeowners insurance, and upkeep.
A reverse mortgage lets homeowners 62 and older convert part of their home equity into cash without a monthly mortgage payment. The most common type is the FHA-insured Home Equity Conversion Mortgage, or HECM. Jumbo and proprietary programs serve higher-value homes and some ages under 62.
The amount available is based on the youngest borrower's age, the home's value, and the expected interest rate. Any existing mortgage is paid off first with the proceeds, and the rest is available to you as a lump sum, a line of credit, monthly payments, or a combination.
For an FHA HECM the youngest borrower must be at least 62, the home must be your primary residence, and you must be able to keep up with property taxes, insurance, and maintenance. Credit and income are reviewed, but there is no payment qualification like a traditional mortgage.
You can take a lump sum at closing, set up a growing line of credit, receive monthly payments for a set term or for life, or combine these options. The line of credit cannot be frozen or reduced while the loan stays in good standing.
Costs include the FHA upfront mortgage insurance premium of 2 percent of the maximum claim amount, an annual mortgage insurance charge of 0.5 percent of the balance, a lender origination fee capped at $6,000, third-party closing costs, and any servicing fee. Interest accrues, so the balance grows over time.
The loan becomes due when the last borrower dies, the home is sold or the title transfers, the home stops being the primary residence, or the borrower fails to keep taxes, insurance, and maintenance current after notice and a chance to cure.
Heirs can sell the home and keep any remaining equity, keep the home by refinancing or paying off the balance, or walk away owing nothing. They owe the lesser of the loan balance or 95 percent of the current appraised value.
A younger spouse who is not yet 62 can be listed as an eligible non-borrowing spouse. They may stay in the home after the borrowing spouse dies, as long as the property charges stay current and the home remains their residence.
Upfront costs are higher than a HELOC or a cash-out refinance. The balance grows, so less equity is left behind. Moving out for more than 12 months can make the loan due. Missing property taxes or insurance can still lead to foreclosure, and proceeds may affect need-based benefits such as Medicaid or SSI.
A HECM requires no monthly mortgage payment, is non-recourse, and its credit line cannot be frozen while the loan is in good standing. A HELOC requires monthly payments, can be reduced or frozen by the lender, and leaves the borrower responsible for any shortfall.
Dan Frio is a Federally Registered Mortgage Loan Officer, NMLS #246527, with 38 years in mortgages. He hosts The Rate Update and explains reverse mortgages in plain English. Dan has appeared on NewsNation and has been quoted by Yahoo Finance and Homes.com. Mortgage products are originated by PBT Bancorp, NMLS #257781, 524 Main St, Hazard, KY 41701. Equal Housing Lender.