What are the Negatives About a Home Equity Conversion Mortgage

In our last post we talked about some of the positive aspects of an Equity Release Loan, also called a Reverse Mortgage or a Home Equity Conversion Mortgage.

So you can make a better decision, in this article we’ll talk about One of the some of the negative features of an Home Equity Conversion Mortgage (HECM).

Costs and Restrictions:

In order to qualify for the loan, underwriting approval requires at least $500 excess cash flow, which includes monthly withdrawal.
The LTV (Loan to Value ratio) is based upon the age of the youngest person living in the house – which means both spouses must be at least 62 years old in order to qualify.
Loan origination fees can be pricey for HUD or FHA guaranteed the loans.
- Typically the 1st part of the fee is calculated on 2% of the first $200,000.
  - For example: If a home is valued at $250,000, then the initial fee would be $4,000.
- The second part of the fee is calculated on 1% of the value of the home over $200,000, up to $650,000 and a maximum fee of $6,000.
  - In our example above, there would be a 1% fee on the remaining $50,000 of the home’s value – $500 additional added to the first fee, giving us a total of $4500 for the HUD approved loan origination fee.
- There may be third party fees of 1% or an additional $2500, which could increase your fees to as much as $7000.
Mortgage Insurance Premium is another up front fee of 2% of the house’s appraised value…another $5000.
So the initial expense of our example loan would be about $12,000 which would typically be rolled into your loan, and you would start with a balance owing of $12,000.
- If your home is appraised at less than $125,000, the minimum origination fee would apply which would be $2500.
- If the appraisal is more than $625,000, the maximum origination fee, excluding general fees is $6000.
  - The LTV or available funds are applied against homes of the maximum value of $625,000
You will incur a $35 a month for a loan management fee, which is actually greater than that amount, because each month, interest is added to the prior month’s fee and charged to your account.

As with the Management fee, there is a hidden cost associated with the Mortgage Insurance Premium of 1.25% of the existing loan balance per month.
- This fee is added onto the balance of the loan and begins to accrue compound interest each month.

What would be your line of credit?

Given today’s interest rate, the available LTV is based on the age of the youngest resident of the house, minus 7. So, if the youngest person is 65 years, the available LTV would be at 58%. See the chart below to see what the available line of credit would be on our example house.In our 3rd and final article, we’ll discuss an Alternative Idea that will probably suit your needs and introduce you to A New Way of Thinking.