What Is A Reverse Mortgage

Oregon Reverse mortgages (also known as Home Equity Conversion Mortgages, abbreviated HECM) are helping older residents in Oregon and achieve greater financial security and enjoy their retirement years to the fullest.

The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into a monthly streams of additional cash flow and/or a line of credit to be repaid when they no longer occupy the home.

The loan, commonly known as HECM, is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. To assist the homeowner in making an informed decision of whether this program meets their needs, they are required to receive consumer education and counseling by a HUD-approved HECM counselor.

HECM counselors will discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, the homeowner should be able to make an independent, informed decision of whether this product will meet their needs.

Oregon homeowners who meet the eligibility criteria can complete a reverse mortgage application by contacting a FHA-approved lending institution such as a bank, mortgage company, or savings and loan association.

Borrower Requirements For Getting A Reverse Mortgage In Oregon:

  • Age 62 years of age or older
  • Own your property and have substantial equity
  • Occupy your property as primary residence
  • Participation in a consumer information session given by an approved HECM counselor

Mortgage Amount Based On:

  • Age of the youngest borrower
  • Current interest rate
  • Lesser of appraised value or the FHA insurance limit

Financial Requirements:

  • No income or credit qualifications are required of the borrower
  • No repayment as long as the property is the primary residence
  • Closing costs may be financed in the mortgage

Property Requirements:

  • Single family home or 1-4 unit home with one unit occupied by the borrower
  • HUD-approved condominiums
  • Manufactured homes ; fee simple
  • Meet FHA property standards and flood requirements

How the Home Equity Conversion Mortgage Program Works For Oregon Homeowners

Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining, and are currently living in the home are eligible to participate in HUD’s reverse mortgage program.

The program allows homeowners to borrow against the equity in their homes. Homeowners can select from five payment plans:

  1. Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  2. Term – equal monthly payments for a fixed period of months selected.
  3. Line of Credit – unscheduled payments or in installments, at times and in amount of borrower’s choosing until the line of credit is exhausted.
  4. Modified Tenure – combination of line of credit with monthly payments for as long as the borrower remains in the home.
  5. Modified Term – combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

Homeowners whose circumstances change can restructure their payment options for a nominal fee of $20. Fee may vary depending on Lender.

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the home is the borrower’s principal residence. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. You can never owe more than your home’s value.

If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. HUD’s Federal Housing Administration (FHA) collects an insurance premium from all borrowers to provide this coverage. This is the beauty of the HUD™ FHA guarantee.

The amount a homeowner can borrow depends on their age, the current interest rate, other loan fees and the appraised value of their home or FHA ‘s mortgage limits for their area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

For example, based on a loan with an interest rates of approximately 9 percent, and a home qualifying for $100,000, a 65-year-old could borrow up to 22 percent of the home’s value; a 75-year-old could borrow up to 41 percent of the home’s value; and, an 85-year-old could borrow up to 58 percent of the home’s value. The percentages do not include closing costs because these charges can vary.

There are no asset or income limitations on borrowers receiving HUD’s reverse mortgages.

There are also no limits on the value of homes qualifying for a HUD reverse mortgage. The value of the home will be determined by an appraisal. However, the amount that may be borrowed is derived from the lower of the appraisal amount or FHA mortgage limit, which is $417,000. For  Alaska, Guam, Hawaii and the Virgin Islands,  the FHA mortgage limits may be adjusted to up to 115 percent of the area median price, or $625,500, whichever is less.

HUD collects funds from insurance premiums charged to the homeowners who receive HECM mortgages. Homeowners are charged an upfront insurance premium which is 2 percent of the maximum claim amount that may be borrowed plus a .5 percent annual premium.

Reverse mortgage

A reverse mortgage is a type of home loan for older homeowners that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner's insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower's estate) is generally not required to repay any additional loan balance in excess of the value of the home.[1]

One may compare a reverse mortgage with a conventional mortgage, whereby the homeowner makes a monthly payment to the lender and after each payment the homeowner's equity increases by the amount of the principal included in the payment.

Regulators and academics have given mixed commentary on the reverse mortgage market. Some economists argue that reverse mortgages may benefit the elderly by smoothing out their income and consumption patterns over time.[2][3] However, regulatory authorities, such as the Consumer Financial Protection Bureau, argue that reverse mortgages are "complex products and difficult for consumers to understand", especially in light of "misleading advertising", low-quality counseling, and "risk of fraud and other scams".[1] Moreover, the Bureau claims that many consumers do not use reverse mortgages for the positive, consumption-smoothing purposes advanced by economists.[1] In Canada, the borrower must seek independent legal advice before being approved for a reverse mortgage.

Reverse mortgages are available in Australia. Under the Responsible Lending Laws the National Consumer Credit Protection Act was amended in 2012 to incorporate a high level of regulation for reverse mortgage. Reverse mortgages are also regulated by the Australian Securities and Investments Commission (ASIC) requiring high compliance and disclosure from lenders and advisers to all borrowers.[4]

Borrowers should seek credit advice from an accredited reverse mortgage specialist before applying for a reverse mortgage. Anyone who wants to engage in credit activities (including lenders, lessors and brokers) must be licensed with ASIC or be a representative of someone who is licensed (that is, they must either have their own licence or come under the umbrella of another licensee as an authorised credit representative or employee) (ASIC)[5]

The cost of getting a reverse mortgage depends on the particular reverse mortgage program the borrower acquires. These costs are frequently rolled into the loan itself and therefore compound with the principal.[6] Typical costs for the reverse mortgage include:

In addition, there may be costs during the life of the reverse mortgage. A monthly service charge may be applied to the balance of the loan (for example, $12 per month[7]), which then compounds with the principal.[6] The best products have zero monthly fees.

When considering a reverse mortgage you should be considering a loan with zero monthly charges and the lowest interest rate. If your bank is charging you a monthly fee then you should be considering another product.

Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements.[6][12] However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed under the Income Test; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.[12]

Most reverse mortgages must be repaid (including all unpaid interest and fees) when they leave the home permanently. This includes when they sell the home or die. However, most reverse mortgages are owner-occupier loans only so that the borrower is not allowed to rent the property to a long-term tenant and move out. A borrower should check this if he thinks he wants to rent his property and move somewhere else.