Home Equity Conversions
1. What is a home equity conversion?
Home equity conversions are methods that allow homeowners access to the equity tied up in their homes without being forced to move or repay a loan from limited income. While there are several forms of home equity conversions, the most common are sale-leaseback and reverse mortgage.
2. What is a sale/leaseback deal?
Under a sale/leaseback, an investor purchases the homeowner’s home and grants the seller a life tenancy. The seller may receive a lump sum payment from which a life annuity is purchased, or may receive monthly mortgage payments from which rent is deducted. The specific arrangement is often dictated by tax considerations. An advantage of this approach is that the seller’s income is protected against the buyer’s default by the mortgage and the annuity purchased at the time of sale.
3. What is a reverse mortgage?
A reverse mortgage is a loan made by a lender to a homeowner that provides either a lump sum, a line of credit or monthly payments to the homeowner. Typically, the loan does not have to be repaid until the homeowner moves, sells, or dies. The money received from the lender is not counted as income for purposes of eligibility for public benefits, such as Medicaid, food stamps or SSI.
The U.S. Department of Housing and Urban Development (HUD) sponsors a program called the Home Equity Conversion Mortgage (HECM), a reverse mortgage program that is insured by the federal government. Theoretically, this mortgage can be made through any
bank or mortgage company that is a Federal Housing Administration (FHA) lender. Some FHA lenders do not participate, but you can call local FHA lenders or the housing specialist at the New Jersey Division on Aging in Trenton to find a participating lender.
Some of the features and requirements of HECM are:
- flexible payment options;
- adjustable-rate mortgages;
- loan repayment cannot exceed the sale proceeds of the house even if the loan and interest exceed this amount;
- HECM’s are available only for single-family homes;
- all owners of the home must be at least 62 years of age; and
- applicants must receive counseling from a HUD certified counseling agency that is separate from the lender.
4. What are the other programs that are available?
Some local lenders have their own reverse mortgage programs, which vary in terms and features from those listed previously.
5. Should I obtain legal advice if I want to pursue a home equity conversion?
Yes, Since a home equity conversion involves what is often one of the most valuable asset, it is vital to consult with an attorney and a financial advisor before undertaking such an arrangement. Like all loans and contracts, home equity conversions involve fees, penalties and obligations as well as the benefits. All of these must be fully understood by the consumer before he or she decides whether or not the particular arrangement is appropriate under the circumstances.
