What is a Reverse Mortgage?

HUD Reverse Mortgage Program

If you are 62 and older you may qualify to borrow against the equity in your home. Have you paid off your mortgage or have only small mortgage balance remaining?

Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options. This type of mortgage loan is also know as a home equity conversion mortgage or HECM.

Unlike ordinary home equity loans, a this mortgage does not require repayment as long as the borrower lives in the home. Mortgage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

How is the size of the mortgage determined?

The size of the mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed.

For example, based on a loan at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent of the home's value, and an 85-year-old could borrow up to 56 percent of the home's value. There are no asset or income limitations on borrowers receiving this type of mortgage.

There are also no limits on the value of homes qualifying for this type of mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher priced homes can't borrow any more than owners of homes valued at the FHA limit.

Where does the Reverse Mortgage program collect its funds?

It collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up front payment plus one half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower's principal balance.

What are some of the payment options?