Over the next few weeks we'll take a closer look at Reverse Mortgages and share some valuable insight from Reverse Mortgage Consultant, Mike Poole with TowneBank Mortgage.
HECM-FIXED RATE MORTGAGE
Single Disbursement Lump Sum Payment ONLY. (One-time withdraw at the time of closing, and future draws are not permitted).
HECM-ADJUSTABLE RATE MORTGAGE*
While adjustable rate HECM loans have various payout options, this may have limits during the first twelve months of the loan. It will be common for the line of credit to be restricted during the initial disbursement period.
In addition, there may be times where funds available will be reduced for the first year to prevent the borrower from exceeding the 60% principle limit usage threshold. Rest assured, the remaining funds will be available on day 366.
*All HECM - Adjustable rate mortgage payout options are made to the homeowner, regardless of verbiage. Rates adjust monthly based on the index plus margin.
This is initial cash drawn from your equity at the time of closing. This is called an "Initial Draw" because the adjustable rate mortgage product and allows for future draws.
LINE OF CREDIT (LOC)
The line of credit is the most popular payout option for multiple reasons. An open line allows a borrower to draw a portion of their loan balance, pay it back, and borrow it back again as needed for future expenses, such as healthcare costs. It does not accumulate interest and mortgage insurance on the amount that is left in the line.
The HECM LOC provides many advantages that are not common to traditional lines of credit...
One advantage is that the available funds are secured. The HECM line of credit is not capped, restricted, frozen, or eliminated if property values decline.
Another advantage is the available funds will grow. The available LOC will grow to reduce the unpaid principle balance. In addition, the available LOC grows at the compounding rate.
The word "TENURE" means "Permanent." In this payout structure, the borrower's net principle limit may be converted to a monthly draw that endures. Even if the loan balance exceeds the value of the home, the borrower will still receive the same monthly payment. These payments will continue as long as one or more borrowers occupy the home and follow the program guidelines.
This can be a good option if the calculated tenure payment is too small and more funds are needed on a monthly bases. Term payments can be higher, but they are not permanent. They are consistent monthly draws for a period of time; Shorter terms will provide larger payments, while longer terms will provide smaller payments.
Imagine taking the homeowner's net principal limit and drawing it in six monthly payments. The payments would be relatively large when compared to drawing equal monthly payments for 20 years.
After the term period ends, the Reverse Mortgage is still active. The borrower can still occupy the home, and the loan does not have to be repaid as long as they continue to follow the program guidelines.
MODIFIED TENURE AND MODIFIED TERM PAYMENT
"Modified," for this purpose, can be defined as a combination of a monthly payment with a line of credit. A "modified tenure," therefore, is a tenure payment that has been adjusted to provide the homeowner with a line of credit.
A "modified term" is a term payment that has been adjusted to provide the homeowner with a line of credit.
If the homeowner wants a $25,000 line of credit established along with a monthly payment, the regular monthly draw will decrease. The primary advantage is that the available line of credit offers more flexibility and line of credit growth than the homeowner would have received with a traditional monthly payment.