Taking Care of Mom and Dad: Home Equity Conversion Mortgage
As mentioned earlier, the Home Equity Conversion Mortgage (HECM) was established in 1989 and is the oldest and most popular reverse mortgage product. HECMs are available to homeowners age 62 or older and are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.
Only FHA-approved lenders may originate HECMs, and owner-occupied properties must meet FHA minimum property standards. The size of an HECM loan varies by the borrower's age, the value of the home and current interest rates; it also depends on the FHA loan limit, which varies from area to area and is usually adjusted annually. In 2002, the FHA loan limit varied from $132,000 to $239,250.
Borrowers can choose to receive the proceeds from an HECM as a lump sum payment, fixed monthly payments (for 10 years or for as long as the borrower occupies the home), a line of credit or a combination of monthly payments and a line of credit.
The line of credit is a popular option. Borrowers are able to draw out money as they need it by simply making a phone call to the lender. The lender then transfers the requested amounts into the borrower's checking account. Interest accrues only on the amounts used, adjustable monthly. The unused portion in the credit line increases about 6 percent annually to reflect inflation, another selling point of this option.
The fee that a lender can charge your parents for an HECM is limited. This origination fee can't exceed $2,000 or 2 percent of the FHA loan limit, whichever is greater. The origination fee and other closing costs may be financed as part of the mortgage.
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.
The interest rate charged on an HECM adjusts monthly or annually -- the borrower chooses. However, these adjustments don't alter the monthly payments that your parents receive (if they have chosen the monthly payment option). Instead, the adjustment affects the total interest charged on the loan, which is added to the loan balance while the loan is outstanding and is paid when the loan becomes due.
Again: Your parents don't make any mortgage payments 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 a principal residence (e.g., through a sale 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.
A reverse mortgage doesn't mean you have to sell your parents' house when they die. You -- as an heir -- can 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, the excess goes to your parents' estate. If the proceeds are less than the amount owed, FHA absorbs the shortfall and makes an insurance payment to the lender.
