How does Age Factor Into The Benefits of a HECM?
If you or a family member is considering a Home Equity Conversion Mortgage, or HECM (also known as a reverse mortgage), you probably know that age is important; after all, FHA requires that borrowers be 62 years old to qualify.
But there are other reasons age matters, especially as it relates to what’s called the Principal Limit, which determines the maximum amount a borrower may take out on a reverse mortgage in his or her lifetime.
The Principal Limit
The Principal Limit determines the amount of home equity a borrower can access with a HECM. Eligible funds for a HECM borrower are determined by the Principal Limit Factor, published by the Department of Housing and Urban Development, which is made up of the following factors:
- The age of an applicant (and, if applicable, the age of an applicant’s spouse)
- Current interest rates
- Appraised home value or the FHA Maximum Claim Amount, currently set at $679,650 for 2018—whichever is less
Age impacts the amount of money available. The older the borrower and spouse, the more money initially available to the borrower. This is because HUD expects it will have to pay more over the life of the loan for younger borrowers. Therefore, the older the borrower, the more likely it is that he or she will receive more initial loan proceeds than a younger borrower.
Additionally, while this may not be the case for everyone, older homeowners often have more home equity because they have a smaller mortgage balance and their home may have appreciated a great deal over the years. This could mean access to more money from the HECM.
Consider Your Payout Options
A HECM can be a useful financial tool for anyone aged 62 or older, based on the chosen payout option and each borrower’s unique situation. For all of the reasons mentioned above, an older borrower seeking a single lump sum, tenure or term payout will receive more than younger borrowers.
But borrowers on the younger side of the spectrum (remember, they must be a minimum of 62 years of age to qualify) seeking a line of credit for retirement planning and long term security will benefit from unused credit in an adjustable rate HECM as it grows over time.
And Don’t Forget HECM for Purchase
Older borrowers don’t just benefit from standard HECMs; they can also do the HECM for Purchase, which allows eligible borrowers to use the HECM for Purchase to finance a home purchase. They can use funds from the sale of a previous residence or other available funds to buy their next primary home. In the case of HECM for Purchase, the older you are, the less you must bring to the closing table.
If you or a family member is looking for assistance with a post-retirement mortgage, the experts at Open Mortgage can help find the right option for you. Give us a call today.
Things to know about Reverse Mortgages:
- At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds
- Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees
- The loan balance grows over time and interest is charged on the outstanding balance
- The borrower remains responsible for property taxes, hazard insurance and home maintenance, and failure to pay these amounts may result in the loss of the home
- Interest on a reverse mortgage is not tax-deductible until the borrower makes partial or full re-payment