Common Myths – 3
Basics, Common Myths August 14th, 2009In previous posts we discussed myths # 1 and #2. Following is another major misunderstanding regarding HECM loans.
3 – There will be nothing left for the kids – Most who are not familiar with the Home Equity Conversion Mortgage program wrongly assume that the lender initially advances the borrower 100% of the equity in the home. Under federal guidelines, this is impossible. LTV calculations are somewhat complex and depend upon a number of factors including age. In general terms, 45% to 85% of the equity might be available. Older borrowers qualify for the larger amounts. Each situation is different.
In any number of cases there may well be substantial net equity (home value minus loan balance) remaining when the loan becomes due. These excess funds go the the borrower or heirs – never to the lender.
In other cases, if (1.) the borrower lives a very long time in the home and (2.) has taken all or most of the funds available – it is very possible that no equity remains when the loan becomes due.
Loan officers should always offer to discuss the Amortization Schedule with clients to help them to project the loan balance over time – apply expected interest and fees – estimate future home value – and determine how much equity remains at any given time. While the loan balance does indeed increase over time, so does the property value. Many homeowners are surprised to learn that some equity may be available for the heirs or estate. Each case is different and requires analysis. But there are many situations wherein a substantial amount of equity could remain available to heirs or the estate. Check your Amortization Schedule for projections.
More Myths
In our next post we will discuss outrageous fees – everybody’s favorite subject.
Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant
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