Reverse Mortgage HECM Loans: The Basics, Pros & Cons

Reverse Mortgage HECM Loans: The Basics, Pros & Cons

We all want more financial freedom, especially as we move into retirement and have more time to spend on vacation and with family. However, with pricy mortgage costs weighing senior homeowners down every month, they can struggle to find enough spare funds to put that free time to good use. 

Many seniors deal with the stressors of a monthly mortgage by accessing their home equity through a reverse mortgage loan. 

Below, we will look at the home equity conversion mortgage pros and cons, how these loans function, and why they might be the solution to your client’s monetary flexibility concerns. 

What are Reverse Mortgages

Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds they receive can be used for almost anything, including paying off their existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving their retirement lifestyle.  

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due and payable. 

Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property. 

Different Types of Reverse Mortgages

HECM Reverse Mortgage

The most common reverse mortgage is a HECM (Home Equity Conversion Mortgage) because it can often provide the most cash for homes valued under $1,149,825 and normally has a lower interest rate than a jumbo reverse mortgage. However, HECM’s are limited to using home values of $1,149,825 and below to calculate proceeds. That means if the borrower’s house is appraised at $1,500,000, the loan amount will only be calculated using up to $1,149,825. 

HECM for Purchase

The HECM for Purchase allows the borrower to buy a home using the equity in the home they are purchasing. Some people use a Reverse Mortgage for Purchase when they are purchasing a new home to right-size from their existing property. Many retirees also use it to relocate closer to friends and family or to warmer weather. A Reverse Mortgage for Purchase requires a down payment, which in many cases can be covered by the proceeds from the sale of the former house and/or savings or other means. The down payment, combined with the Reverse Mortgage for Purchase loan, can be used to buy the new home. That means no monthly mortgage payments* are required, which can leave more money in the borrower’s pocket and improve cash flow. 

Choice Jumbo Reverse Mortgage – Only at Smartfi^®!

If your client’s home is valued above the HECM limit ($1,149,825) and they want to get a higher loan amount by accessing more of their home’s equity, then consider Smartfi Home Loan’s Choice Jumbo Reverse Mortgage. The Smartfi Choice has no home value limit and can loan up to $4,000,000! 

How To Apply for a Reverse Mortgage Loan

It’s simple and easy to qualify for a reverse mortgage: 

• The borrower must be at least 62 years old for a HECM. 
  • (or at least 55 years old for a Smartfi Choice Jumbo Reverse Mortgage)** 
• The borrower must own the property and live in it as their primary residence 
• The property must have an acceptable appraisal  

The borrower’s age, appraised home value, and current interest rates are used to calculate the amount they may receive. 

Other factors to know: 

•  The property must be FHA approved. 
•  Qualification is based on the youngest borrower on the application.** 
•  Primary residence means that they must reside at the property consecutively for six months and one day per year. 
• The borrower must continue to pay property taxes, home insurance, any HOA fees, and maintain the property. 
• Reverse mortgages can be used to pay off existing mortgages on their home. In fact, if they have a traditional mortgage, it is required that they pay off this mortgage (and any additional liens on the property) to obtain the reverse mortgage.

Home Equity Conversion Mortgage Pros and Cons

Common Questions

Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so your client can understand the facts. 

Does the bank own the borrower’s home? 

No, the bank never owns the borrower’s home. They remain the owner of their home and can stay as long as they wish. As the homeowner, they must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period. 

When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to the borrower or their heirs. 

How much can be borrowed?

• The age of the youngest borrower  
• Home value  
• Current interest rates  

Although the original home value that is initially provided to calculate the preliminary loan amount is used, an independent appraiser must visit the borrower’s home to ascertain the current value of their home. The loan amount is then re-calculated according to this official home value. 

What if the borrower already has a mortgage? 

That is absolutely fine. 

If the borrower qualifies, a reverse mortgage will first pay off their existing mortgage and then give them the remaining proceeds. In fact, many of our partners’ borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage. 

Will the borrower’s children lose their inheritance?

The borrower’s children have options when it comes to their home. Typically the loan is repaid through the sale of the home. Their heirs can choose to sell the home, pay the loan and receive any remaining equity; or, they can purchase/refinance the home, and pay back the loan with a traditional mortgage. 

Does a reverse mortgage require monthly payments?

There are never any monthly mortgage payments required. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home. 

What can your client use their reverse mortgage for?

The tax-free money the borrower receives is intended to support their retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to them! 

• Increase monthly cash flow 
• Pay off an existing mortgage (required as part of the loan) 
• Pay credit card bills 
• Pay medical bills 
• Fund home repairs and improvements 
• Pay property taxes and home insurance 
• Travel 
• Gifts 
• Improve their lifestyle 
• Invest or diversify their retirement portfolio 
• In–home care  

Reverse Mortgage Safeguards

Consumer safeguards are created to ensure the borrower and their family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for their benefit: 

Counseling

The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi Choice, or other reverse mortgage, to undergo third-party counseling so that they feel completely comfortable with the process and understand all their options. 

No Prepayment Penalty

The borrower can choose to repay the loan at any time without incurring any additional costs.

Non-Recourse Loan

A non-recourse loan protects the borrower from being held liable for the loan beyond the value of the home. Their financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due. 

Addressing Other Concerns About Reverse Mortgages

Borrower Responsibilities

Taxes and Insurance

The borrower is required to remain current on their property taxes, home insurance, and if applicable, condo fees and homeowner association fees.

Property Maintenance 

The borrower is responsible for completing mandatory repairs and basic home maintenance during the life of the loan.

Occupancy Requirements 

The home must be the borrower’s principal residence which means they need to live in their home consecutively for six months and one day of the year. 

Learn More About Reverse Mortgages With Smartfi Home Loans

Ready to learn more about reverse mortgages? Call us at  (877) 816-6706 or contact us online today to get started on your journey to understanding and offering reverse mortgage products.