The Home Equity
Conversion Mortgage (HECM) is the
oldest and most popular reverse mortgage
product. Available since 1989 to homeowners
62 or older, HECMs are insured by the federal
government through the Federal Housing Administration
(FHA), a part of the U.S. Department of
Housing and Urban Development.
Eligible home types include single-family
homes, manufactured homes built after June
1976, condominiums, and townhomes.
The size of a HECM varies with: (1) the
borrower's age; (2) the value of the home;
and (3) current interest rates. The location
of the borrower’s home also affects
the loan size. The maximum size of a HECM
depends on the FHA Loan Limit, which varies
from area to area and is usually adjusted
annually.
Currently (for 2003), the FHA loan limit
varies from a low of $154,896 (for rural
areas) to a high of $280,749 (for high-cost
metropolitan areas). The 2003 loan limit
for a particular area may be found at HUD's
Web site. FHA provides free software to
lenders to help compute the applicable loan
amount for each borrower.
Borrowers can choose to receive the proceeds
from a HECM as (1) a lump sum payment, (2)
fixed monthly payments, (3) a line of credit,
or (4) a combination of these.
The fee charged to a borrower for a HECM
is limited. The origination fee can't exceed
$2,000 or 2 percent of the maximum claim
amount (the FHA loan limit), whichever is
greater. In 2002, therefore, this 2 percent
limit ranges between $3,098 (2 percent of
$154,896) and $5,615 (2 percent of $280,749).
The entire amount of the origination fee
may be financed as part of the mortgage,
and certain other closing costs. FHA Mortgagee
Letter 00-10 spells out the size of the
origination fee that may be charged to borrowers
and what the fee cap covers.
HECM borrowers must also pay an FHA insurance
premium, equal to 2 percent of the loan
amount up-front, plus an annual premium
thereafter equal to 0.5 percent of the loan
amount.
Typically the only cost that a borrower
must pay for upfront out of pocket is for
an appraisal fee. The remaining closing
costs and fees generally can be financed
as part of the reverse mortgage.
The interest rate charged on a HECM adjusts
either monthly or annually, depending on
which option the borrower chooses. However,
these adjustments don't alter the monthly
payments that borrowers can receive (if
they have chosen the monthly payment option).
Instead, the adjustment affects the total
interest that is charged on the loan, which
is added to the loan balance while the loan
is outstanding and is paid when the loan
becomes due.
A borrower is not required to make any mortgage
payments to the lender during the life of
the HECM. The HECM becomes repayable, in
full, when the sole remaining borrower dies
or no longer occupies the home as his or
her principal residence (e.g., through a
sale of the home or a permanent move out
of the home). The repayment obligation is
equal to the sum of the total funds received
by the borrower, interest, and any closing
costs and other charges financed as part
of the loan.
The borrower or borrower's heirs/estate
may pay off the loan and keep the home.
If not, the lender is repaid when the home
is sold. If the sales proceeds exceed the
amount owed, excess proceeds go to the borrower
or borrower's heirs/estate. If the proceeds
are less than the amount owed, FHA absorbs
the shortfall and makes an insurance claim
payment to the lender.
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