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Reverse Mortgages
Including the Home Equity Conversion Mortgage (HECM)
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Reverse Mortgages: Convert Home Equity into Usable Dollars

Maybe you’ve watched the value of your home skyrocket but wonder how it really benefits you, especially if you’re feeling house-rich and cash-poor.

Many seniors find maintaining a home daunting, especially while they’re trying to enjoy a quality retirement, meet daily living and medical expenses, and fund hobbies.

Some are overcoming such financial hurdles by taking out reverse mortgages. Such loans allow you to convert your home equity into dollars. Those dollars then can be used for anything from upgrading your current home to paying for medicine or home-based health care. You poured money into your house for years and now you’re reversing the process—taking money out. A reverse mortgage is a loan, yet functions as if you sold your home early and you’re getting paid while still occupying the property.

Dispelling myths

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There are a number of myths associated with reverse mortgages, the most common of which is that lenders can take possession of your house. Not true, says Peter Bell, president of Washington, D.C.-based National Reverse Mortgage Lenders Association (NRMLA). You can’t be forced to sell or leave your home if the money you’ve received from the reverse mortgage exceeds the value of the home. Also, you won’t owe more than your home's appraised value when it’s sold. The loan is paid back when the home is sold. Your heirs can 1) refinance and pay off the loan or 2) sell the property, pay off the loan, and keep the remaining funds.

Typically the older you are and the more your home is worth, the larger the amount of money you can get. Borrowers and the youngest person on the home’s title or deed must be at least 62 and the home must be an owner-occupied,  primary residence to qualify. Loans are based on the property, not income or credit history. Depending on the loan, borrowers can receive tax free funds in a lump sum, as monthly income, as a line of credit, or a combination of the three. You remain responsible for home maintenance, insurance, and taxes.

As with any loan, reverse mortgages have costs associated with them. Depending on the product, costs include origination fees, up-front mortgage insurance premiums, appraisal fees, and closing costs. Most of such costs can be rolled into the loan.

Reverse mortgages have become increasingly popular.  48,493 such loans were taken out versus just under 8,000 loans in 2001.

Bell describes most borrowers as one of three groups. The first are need-based borrowers looking to make ends meet. Others are security oriented and want stand-by cash for unexpected expenses. The third group is concerned with lifestyle, to travel or enjoy cultural events.

He says people have used such money to improve their lives in many ways. An airplane kit, a vacation cabin. Some have used the money to renovate homes to facilitate aging in place. Bell tells of one woman, who before getting a reverse mortgage, had to choose between visiting the grocery store or the pharmacy when she received her Social Security check.

Here’s some basic information on reverse mortgage options:

The Home Equity Conversion Mortgage (HECM)

-Available to homeowners of a single-family residence, a 1-4 unit dwelling (with one unit occupied by the borrower), U.S. Department of Housing and Urban Development (HUD)-approved condos or planned unit developments and mobile homes that meet HUD guidelines 

-Loan size is determined by age, appraised home value, current interest rates and property location. HECM loan sizes also depend on the maximum loan limits in your county. Loan limits typically available in major urban areas, is $362,790, and the lowest limit, which typically includes rural and non-metro areas is $200,160. For county loan limits, visit

-Insured by the federal government (FHA).

Financial Freedom Cash Account Plan

-Aimed at seniors in high-priced markets whose homes are worth more than the Fannie Mae and FHA lending limits. There’s almost no maximum home value or loan limit.

-Administered by Financial Freedom Senior Funding Corporation, Irvine, Calif.

-Three plans (the Standard Option, the Zero Point Option, and the Simply Zero Option) are available. The benefits vary and range from no origination fee and no closing costs, the ability to have an open-ended revolving line of credit and borrowers’ ability to limit the loan obligation to a stated percentage of the home’s full market value.

As with any loan, reverse mortgages have costs associated with them. Depending on the product, costs include origination fees, up-front mortgage insurance premiums, appraisal fees and closing costs. Most of such costs can be rolled into the loan. Loans based on property, not credit history.

Buyer Beware

1. If you participate in a means-tested program, such as Medicaid or Supplemental Security Income (SSI), choose a pay-out option that delivers payments in fixed monthly amounts versus one lump sum to avoid impacting your eligibility for such programs.

2. Consult with your family and attorney, and carefully research reverse mortgages to determine whether a reverse mortgage is right for you.

More Information


   AARP’s complimentary booklet Home Made Money, or call 800-209-8085

   Fannie Mae,

   Financial Freedom Senior Funding Corporation,

   National Reverse. Mortg. Lenders Association,    The group offers a booklet, Just the FAQs: Answers to

                     Common Questions about Reverse Mortgages. You can order a copy at their website. The site also includes a calculator to estimate how much you could get through a HECM or a Home Keeper  loan.

   U.S. Dept. of Housing & Urban Development


-Reverse Mortgages for Dummies by Sarah Glendon Lyons and John E. Lucas (Wiley Publishing, Inc., 2005)

-The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income by Tom Kelly (Wiley, 2005)

Source: - Real Estate Matters Silver Edition.  News & Issues for the Mature Market - February 2006


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