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Home Equity Conversion Mortgage

Home Equity Conversion Mortgages are designed to give you access to funds from one of your biggest investments - your home. Also known as a a reverse mortgage, a Home Equity Conversion Mortgage allows you to borrow based on the equity of your home. If you are at least 62 years old and own the home you consider your primary residence, then a Home Equity Conversion Mortgage can help you fund the next stages of your life.

What can you do with a Home Equity Conversion Mortgage? Lots of things, like:

  • Eliminate your mortgage payment
  • Improve your cash flow
  • Build an emergency fund

The benefits are:

  • Monthly payment not required (Still required to pay taxes, insurance, and maintenance costs)
  • Establish a line of credit that can grow in value over time.
  • Flexible pay out options
  • No pre-payment penalties
  • Insured by the Federal Housing Administration (FHA)

Our home loan experts take time to listen to what you want to achieve and then work closely with you to find a Mortgage that fits your needs and budget. You can receive the loan proceeds through:

  • Line of Credit
  • Monthly Payments
  • Loan advance
  • Or any combination of the above

Home Equity Conversion Mortgage at a Glance

A Home Equity Conversion Mortgage is a simply a loan that must meet HUD guidelines, is insured by the FHA, and allows seniors to convert a portion of their equity into cash. Here's everything you need to know about a Home Equity Conversion Mortgage at a glance. We've summarized the information so it's easy to understand the key points.

 

How Does a HECM Work?

Uses a portion of home’s equity to:

  • Pay off existing mortgage(s) and liens
  • Convert some of the equity into cash
  • Eliminate monthly mortgage payments
  • Homeowner is responsible for maintaining taxes and insurance

What are the qualifications for both the borrower & the property?

  • The borrowers must be 62 or older, own their home (be on title), and their home must be their primary residence.
  • After completing a loan application and counseling, they will also undergo a financial assessment. This is performed by their underwriter to ensure the borrower can uphold the responsibilities of the loan.
  • The property, which is the collateral for the loan and the only required asset used to pay back the loan, must be a single-family residence, FHA approved condominium or a 2-4 unit, owner occupied property.            

Counseling by a HUD approved counselor is required

All borrowers, non-borrowing spouses, guardians, conservators, and power of attorneys are required to be counseled by a third party, HUD-approved counselor. This can be done over the phone or face to face, in compliance with state regulations. The signed and dated counseling certificate is required before loan processing can begin.

What are the borrower responsibilities with the Reverse Mortgage?

  • Remain current on property taxes.
  • Continue to pay homeowners insurance.
  • Maintain the property.
  • Reside in the home.

 What are the benefits of the Reverse Mortgage?

  • There are no required monthly mortgage payments, but the client must pay their property taxes, homeowners insurance, and home maintenance costs.
  • This is a non-recourse loan.
  • There are no pre-payment penalties.
  • There are flexible pay out options.
 

When is the loan due and payable?

  • When the home is sold, vacated or abandoned.
  • When the last borrower either passes away or moves from the home for 12 consecutive months.
  • If the client fails to uphold any of the borrower responsibilities, including staying current on their taxes and insurance and maintaining their home.

The borrowers or the heirs should let the servicer on the loan know that a maturity event has occurred and the servicer will work with them to determine how the loan will be repaid. Typically, the servicer will order an appraisal to determine the value of the home at the time. Then, when the home is sold, the RM payoff will be deducted from the sale proceeds. Any additional money from the sale of the home is passed onto the borrower or their heirs. The heirs could also choose to keep the home and refinance it in their names.

 

What are the benefits of the Non-Recourse Feature?

  • The home is the only asset used to pay back loan
  • FHA guarantees the borrower will not owe more than the home is worth at the time it is sold
  • FHA Mortgage Insurance Premium (MIP)

The non-recourse feature is facilitated by the payment of the Mortgage Insurance Premium (MIP). MIP is charged both initially with closing costs and monthly by being added to the Unpaid Principal Balance.

  • Upfront MIP will be 2% of the Maximum Claim Amount
  • Annual MIP is 0.5% of the Unpaid Principal Balance. The servicer will divide by 12 and add it to the loan balance in the monthly servicing statement with accrued interest.                      
 

How Much Can Be Borrowed?

  • Percentage of Maximum Claim Amount (MCA) will be lesser of the appraised value or FHA County Lending Limit - $679,650 (as of 1/1/2018)
  • HECM loan origination fees are regulated by HUD and are tied to the Maximum Claim Amount (MCA).
  • The loan origination fee cannot be more than 2% on the initial $200,000 of the Maximum Claim Amount (MCA) and 1% on the balance after that with a cap of $6,000.
 

Principal Limit and Loan Amount

Proceeds that can be accessed during the life of the loan. Use three factors to get the Principal Limit:

  1. Age of the youngest borrower or eligible NBS
  2. Expected interest rate
  3. Maximum Claim Amount
 

Loan Proceeds are Limited in the First Year

  • In 2013, HUD set limits on the funds that are available at closing or in the first 12 months.
  • Calculations are done for you by the Reverse Mortgage Calculator.
  • The Initial Disbursement Limit (IDL) is the amount of proceeds available in the first year.
  • Proceeds available after the one year anniversary are called “reserves.”
  • Reserves are only available on the adjustable rate HECM.

Key Terms

When considering a Home Equity Conversion Mortgage, it's valuable to understand some of the key terms and what they mean. Here's a list:

Term

​Definition

​Formula

Maximum Claim Amount (MCA)

 

The lesser of the Appraisal or the FHA County Lending Limit of $679,650

 

A factor used to determine the Principal Limit

Principal Limit Factor (PFL)

Found on the HUD Factor Table and links age of youngest borrower or non-bowering spouse (NBS) to Expected Interest Rate A factor used to determine the Principal Limit.

Principal Limit (PL)

Proceeds that the client can access of the life of the loan MCA x PLF = Principal Limit

 

Mandatory Obligations (MO)

Fees, charges, and lien payoffs required by Lender to be paid or held at closing  
 

Initial Disbursement Limit (IDL)

Limit on proceeds available at closing and first 12 months

Greater of either:

60% of the Principal Limit

Or

Mandatory Obligations +10% of Principal Limit

 

Mortgage Insurance Premium (MIP)

Fee paid to FHA to insure non-recourse feature of the loan

MIP is paid in two (2) phases

  • Upfront in closing costs and
  • Annual MIP of 0.5%, added monthly (servicer adds to loan balance)
 
 

Reserves

Funds held in reserve from the Principal Limit and available for use at the 13th month of the loan Principal Limit - Initial Disbursement Limit = Reserves

Everything, everywhere

E-Central Credit Union offers mortgage loans to Southern California members throughout Los Angeles County including Pasadena, South Pasadena, Alhambra, San Marino, Arcadia, Sierra Madre, Altadena, Temple City, Monrovia and offers home loans nationwide.
To learn more about our home loans or to apply for a mortgage contact us or visit our Pasadena branch today.