Seniors who own their home have been able to use a reverse mortgage to gain access to the home's equity with no corresponding monthly payment. This payment-free resource has allowed thousands of retirees to travel, make otherwise impossible purchases or just to live comfortably on limited incomes. Less well-known is that senior homeowners are not required to own their home free and clear in order to obtain a reverse mortgage. In fact, a reverse mortgage can be used to eliminate all home loan payments.
The HECM Reverse Mortgage
According to a study conducted by Hui Shan (Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market, April, 2009, Federal Reserve Board of Governors), the Home Equity Conversion Mortgage (HECM) accounts for more than 90% of all reverse mortgages in the United States. The program was established by Congress in 1987, and the first HECM loan was processed two years later. Although millions of homeowners have qualified for the program, it has been employed by relatively few borrowers. However, within the past year, increased lending limits coupled with asset losses in IRAs appear to have heightened interest in reverse mortgages.
An HECM reverse mortgage differs significantly from conventional home mortgages. With a conventional, or forward, mortgage, the homeowner borrows some portion of the home's appraised value for a fixed period of time, typically 15 or 30 years, and then repays the amount borrowed plus interest on a monthly basis. Failure to make loan payments can result in foreclosure and loss of the home.
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