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 Posted: Sat Apr 03, 2004 2:38 am Post subject: HECM - The only Reverse Mortgage Insured by the FHA |
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The Home Equity Conversion Mortgage (HECM) is the only kind of reverse mortgage insured by the Federal Housing Administration (FHA) within the U.S Department of Housing and Urban Development (HUD).
The HECM gives an opportunity to homeowners aged 62 or above so that they can borrow against their home equity. Usually a mortgage lender, bank, credit union or savings and loan association provides the loan.
Features
- Creditline:
The cash payments in a home equity conversion mortgage are often offered through line of credit which keeps growing every month till you withdraw the remaining cash. This gives you a lot more cash than a creditline that does not grow.
The rate of growth in the creditline depends upon the current interest rate charged on the loan plus one-half of a percentage point, divided by 12. For instance, if the interest rate this month is 6%, the creditline will grow by = 5.5% + 0.5% = 6%/12 = 0.5%. So, if at the start of this month, the credit line is $70,000, it will be equal to $70,350 at the end (0.5% of $70,000).
- Mortgage Rate:
The HECM is the only reverse mortgage that allows you to choose your interest rate. The rate offered here is either an annual or a monthly adjustable rate. Each of these rates fluctuates with respect to changes in the 1 year U.S Treasury Security Rate (T-rate) plus the margin preset by the Fannie Mae.
The annual adjustable rate does not increase or decrease by more than 2% points per year and 5 total points throughout the life of the loan. But the rate adjusting monthly can vary only by 10% and that too, for the entire loan period.
HECM and other Reverse Mortgages
HECM loans provide the largest loan advances compared to other reverse mortgages or any other home loan. These are much less costly than other reverse mortgages. The only reverse mortgages that cost less than the HECM are those you can obtain from local and state governments.
Benefits for the borrowers
- It is easy to qualify for a home equity conversion mortgage, as it does not consider a borrower's income.
- You can pay off any other home loan with the cash advance from this kind of mortgage.
- HECM is insured by the government's FHA insurance program which ensures that you receive the loan advances at regular intervals.
- You need not sell or vacate your home if the loan balance exceeds your property value. You can never owe more than your property value.
- You need not use other assets to repay the debt as the FHA collects an insurance premium from all borrowers to pay off the extra money to the lender.
- You can repay the loan any time you prefer without any prepayment penalty.
Benefits for the lender
The lenders offering HECM can benefit in the following ways:
- Even if the borrower passes away, sells off the property, or abandons it, the lender gets back the money he has offered. The total cash amount received by the lender includes the entire principal loan amount, the accrued interest and the mortgage insurance premiums. But the lender never receives any amount in excess of the property value.
- If you sell off the property and the sale proceeds aren't sufficient enough to add up to your mortgage payments, then the FHA pays off the extra amount to the lender through the mortgage insurance premiums which it collects from you. Thus, the FHA guarantees that any amount of shortfall shall be paid to the lender.
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