The HECM (Home Equity Conversion Mortgage) is the FHA’s reverse mortgage program applicable to seniors over the age of 62. The reverse mortgage plan allows participants to withdraw money out of their home’s equity. The reverse mortgage is a direct opposite of the conventional mortgage option in that homeowners essentially are not required to pay back the loan until certain obligations are no longer met.

Though many reverse mortgage options are available, the HECM is the most popular and it is a government insured mortgage loan. It is part of the FHA’s (Federal Housing Administration) plan to allow seniors to extract money out of their home if needed.

Seniors utilize reverse mortgages to supplement social security payments, pay unexpected medical payments, perform improvements to their homes or for other associated expenses. The additional source of income is often a welcome relief in times of hardship.

The Fees Associated with a Reverse Mortgage

Before you dive into this mortgage, be aware of the fees and payments required by your FHA approved lender so you can budget properly. Though you can finance most of the fees, you should still be aware of the charges.

Origination fee

– Lenders will charge you an origination fee based on the value of your home. If your home is valued under $125,000 the lender can assess a fee of up to $2,500. If your home is valued above $125,000, lenders may charge a fee of around 2% for the first $200,000. If your home is valued over $200,000, your lender will most likely charge you 1% of the value over $200,000.

For example, if your home is valued at $300,000, your lender will charge you up to 2% of $200,000 and then up to 1% of the remaining $100,000.

With the saver option, the upfront fees are reduced significantly; however, the amount you can borrow is not as high as with the standard option.

Though the fees seem high, this insurance premium helps to protect you should you or your heirs need to sell the home to pay back the mortgage. The HECM guarantees that your total debt will never exceed the appraised value of your home.

Closing Costs and Service Fees

Similar to any conventional loan, the closing costs include appraisal, title fees, inspections, credit checks, etc. Service fees are added on to the monthly payment from your lender as a fee for distributing the loan, sending statements and ensuring you keep up with paying taxes and insurance (you are still responsible for taxes and insurance even though you are taking equity out of your home in the form of a loan).

Requirements

The government requires you to abide by the below guidelines in order to qualify for a reverse mortgage:

• You must be at least 62 years of age
• You must either own the property or most of the equity
• You are required to live in the property
• You are required to sit with an HECM counselor to discuss your options
• Your property must meet FHA property standards and flood requirements
• As stated before, you are required to pay a mortgage Insurance Premium (MIP). You can choose between the 2% standard option or the 0.01% saver option.)

When you apply for a mortgage, the borrowed amount also depends on the following factors: borrower’s age (if more than one borrower, the age of the youngest borrower is used), current interest rate, and the appraised value of your home vs. the FHA mortgage limit.

Discuss your Options in Length

When you meet with a financial counselor, make sure to discuss your eligibility requirements and any other options for extracting cash from your home equity. You may find a reverse mortgage is not the ideal choice for your current situation. Take the time to ask the right questions and research thoroughly before you make this important decision.