Home Equity Conversion Mortgage

1
Home Equity Conversion Mortgage

• Meg Burns
• Potomac Partners, LLC

2
Reverse Mortgage Basics

• Reverse mortgages (RMs) permit seniors to convert
  home equity into cash
• RMs permit homeowners to stay in home for as long
  as they are able
• RMs require no repayment so long as the borrower
  remains in the home

3
Basic Eligibility Requirements

• Reverse mortgage borrowers must be at least 62
  years old
• Property must be borrowers primary residence
• Borrowers are responsible for upkeep, taxes, and
  homeowners insurance

4
FHA Insurance Coverage

• FHA Home Equity Conversion Mortgage product is
  most popular
• FHA HECMs represent 92 of RM business
• FHA is mortgage insurance company

5
FHA Insurance Coverage

• FHA makes RMs possible, even for those with
  lower-valued homes
• FHA protects lenders against crossover risk (loan
  balance is greater than property value)
• FHA permits borrowers to draw out more equity
• FHA insurance guarantees borrower is paid

6
FHA Insurance Coverage

Loan Balance
Crossover Risk (FHA)
Property Value
Initial Principal Limit (FHA)
Time
7
Mechanics

• The principal limit is the maximum amount that a
  borrower can draw
• The principal limit is a proportion of a total
  value determined by the
• Age of youngest borrower
• Interest rate (10-year CMT)
• Maximum claim (lower of either the appraised
  value of the home or the FHA loan limit)

8
Mechanics

• Payment plan options
• Line of credit
• Term
• Tenure
• Combination LOC/term
• Combination LOC/tenure
• Borrowers may choose to change their plan at any
  time for a 20 charge

9
Counseling Requirement

• Counselors must explain
• How HECM works, costs, calculation of principal
  limit
• Financial implications of a HECM
• Alternatives to a HECM
• Borrowers obligations

10
Loan Costs

• Origination fee
• Mortgage Insurance premium
• Traditional closing costs
• Servicing fee