can i get a 100% fha hecm mortgage?
TRANSCRIPT
You do not get 100% of the equity you have in your home via a reverse mortgage. You get a percentage of that equity based on the age of the youngest borrower at the closing of the loan. A reverse mortgage, as discussed in previous articles, is different from a regular mortgage.
For the reason why you do not draw most or all of your equity out against a reverse mortgage, let’s look at the two types of mortgages, their purposes and their differences.
Regular Mortgage
With a regular mortgage you borrow money from a lender to apply to the purchase price of a home (or other types of real estate). The difference between the cost of the property and the amount of the loan from the lender is your “equity” in the home. As you pay your mortgage your equity goes up and the mortgage amount (the amount you still owe on the home) goes down. Over time you pay off the mortgage, and you wind up with 100% equity in your home. The purpose of a regular mortgage is to help you purchase your home by providing a (most of the time substantial) part of the purchase price for you.
Reverse Mortgage
With a reverse mortgage you start out with equity in your home and a loan (a mortgage) is placed on your property from which you draw money. You are accessing the equity in your home (which is not liquid and mostly unusable) to turn it into cash (which is liquid and very usable for just about anything). As the cash is disbursed to you the mortgage balance increases and interest on that balance is paid by accrual (it accumulates) by applying a small amount of the remaining equity you have in your home to that interest. The purpose of a Reverse Mortgage is to allow you to access the equity in your home without having to sell the home or to place another mortgage on it against which a monthly payment would have to be made.
So, when the loan is first funded, actuarial tables are used to estimate the life expectancy of the borrower at the date of funding, and that combined with the anticipated interest rate on the note provides a calculation formula for how much money may be disbursed against the value of the home at the time the loan is closed.
The good news is twofold: One, since not all the equity in the home is applied to the Reverse Mortgage, if you decide to sell your home and move somewhere else, you will still have equity which may be paid to you even after paying off the outstanding balance of the reverse mortgage; and two, even if the loan is closed, as your age increase, so does the amount of money that may be disbursed increase.
That amount never reaches 100%, but it does go up over time. As a result, those that elect to take their money using a line of credit will see that line of credit go up as time goes on. It is even possible to re-finance down the road (after some aging takes place) into a new reverse mortgage to access that additional equity that has built up over time. A schedule is provided by most good lenders which will show an estimate of that increase over time.
FHA assumes the value of your home appreciates over time, so the assumption is that the interest that is accrued is somewhat offset by the appreciation in your property.
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About Justin McHood:Justin McHood is Americas Mortgage Commentator and has been providing Mortgage commentary for over 10 years.
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