When you think of retirement planning, you probably think of pensions, IRAs, social security and other, similar programs, but your home can also be the source of monthly or lump sum payments to help make your retirement more comfortable.
If you are 62 or older, own your own home and have no mortgage or only a small mortgage balance remaining, and your home is your primary residence, you are eligible for the Federal Housing Administration's reverse mortgage program which allows you to borrow against the equity in your home.
The Home Equity Conversion Mortgage (HECM), FHA's reverse mortgage program, allows homeowners to withdraw money against the equity in their homes. Funds may be withdrawn in the form of a fixed monthly "payment," a line of credit, or a combination of the two.
HECMs can also be used to purchase a primary residence. This is particularly useful for homeowners who wish to downsize or move closer to family or a retirement location. You must have cash available to pay the difference between the HECM proceeds from your old home and the sales price and closing costs for your new property.
HECM counselors are available to explain the eligibility requirements for reverse mortgages, make sure you understand the financial implications of an HECM, and to discuss alternatives to getting an HECM. It's also their job to discuss provisions for the HECM becoming due and payable, and your ability to keep up with property taxes and homeowners’ insurance payments. HECM counseling will prepare you to make an independent, informed decision about whether an HECM is a right choice for you.
To qualify for one of these special mortgages, you must be 62 or older, own your property or have a small mortgage balance, occupy the property as your principal residence, not be delinquent on any federal debt and participate in a consumer information session given by an approved HECM counselor.
The amount available to homeowners for reverse mortgages is based on the age of the youngest borrower, the current interest rate, the lesser of the appraised value or the HECM FHA mortgage limit or the sales price of the home and which initial Mortgage Insurance Premium (MIP) option you choose. You may choose between the 2% HECM Standard option or the .01% HECM Saver option.
Financial Requirements for Home Equity Conversion Mortgages are geared towards retirement-age homeowners. There are no income or employment requirements, no repayment is required as long as the property is your principal residence and the conditions of the mortgage are met. You can even finance the closing costs in the mortgage.
The following property types are eligible as long as they meet all FHA property standards and flood requirements: single family homes, multi-family homes with one to four units as long as one unit is occupied by the borrower, HUD-approved condominiums and manufactured homes that meet FHA requirements.
Five payment plans are available. Tenure provides equal monthly payments for as long as one borrower occupies the property as a principal residence. Term provides equal monthly payments for a set period. The line of Credit provides unscheduled payments or installments available when you decide you need the money until the line of credit is exhausted. Modified Tenure is a combination of a line of credit and scheduled monthly payments for as long as you occupy your home. Modified Term is a combination of a line of credit plus monthly payments for a set period. Your payment options may be changed for a fee of $20.
HECMs are especially useful for retirement planning because they do not require repayment as long as you live in the home and meet the obligations of the mortgage. When the home is sold, principal and interest are paid to the lender. You or your heirs are entitled to the remaining balance from the sale. If the sale doesn't generate enough money to pay the amount owed, the FHA pays the lender the difference from the MIP you pay as part of the loan process.