What Pay Out Options Do I Have?
The HECM loan allows the borrower to have a repair set aside and complete repairs after closing.
In This Article We Will Discuss…
What PAYOUT OPTIONS do I have With a Reverse Mortgage?
The payout possibilities of the fixed rate HECM and the adjustable rate HECM are distinctively different. Even though fixed rate HECMs serve a purpose, they are accessible as a Single Disbursement Lump Sum Payment. The adjustable rate (ARM) on the other hand is a lot more flexible.
Let us throw more light on the payout options offered to homeowners.
WITH A HECM-FIXED Single Disbursement Lump Sum Payment ONLY
Fixed rate HECM are new products, and they are close-ended loans. “Close-End” implies that the borrower takes all their proceeds when the loan closes. In other words, these loans are not available for future draws. The review of the loan program in September 2013 states that the homeowner is not under an obligation to draw all of the funds for which that they are qualified.
WITH A HECM-ARM PAYOUT OPTION
Although varied options are available for adjustable rate HECM payouts, payments may not be allowed in the first twelve months of the loan. It is usual to have the line of credit restricted during the initial disbursement period. Also, there will be situations where a monthly payment will be restricted to the first year to stop the borrower from going beyond the 60% principal limit usage threshold. Be assured that the remaining funds will be accessible on the 366th day.
This refers to the cash drawn at the closing time. Meanwhile, these funds are not available for funding; that is after the three-day rescission period ends. However, it is called an ‘Initial Draw’ because the ARM product permits future draws.
Line of Credit (LOC)
For several reasons, a line of credit is the most popular payout option. An open line lets a borrower repay a part of their loan balance and borrow it again when needed. It does not accumulate interest and mortgage insurance on the remaining amount in the line. These two items are right of other traditional (forward) lines of credit too. Meanwhile, the HECM LOC also has two foremost benefits that are NOT common to traditional lines of credit:
HERE’S A FUN FACT ABOUT NEEDED REPAIRS…
Cost to cure amounts over $2,000 must be documented with a contractors bid.
The available funds are safe.
The HECM line of credit capped, limited, frozen, or abolished if the property’s values drops.
The remaining funds will increase.
The available LOC will increase with every payment to decrease the outstanding principal balance. Also, the available LOC increases at a compounding rate. LOC growth will be discussed later because it is one of the high points for obtaining a Reverse Mortgage.
The word “TENURE” means “Permanent.” This payout structure makes it possible for the borrower’s net principal limit to be converted into a lasting monthly draw. The payments continue on condition that one or more borrowers live in the home and adhere to the program’s procedures. When explaining this option over the phone, a “d” could be added to make it sound “tenured” payments (or “lifetime” payments) because most people usually misunderstand – thinking it is a “certain-year” program.
It can be a perfect option if the calculated tenure payment is too small and more funds are required every month. Term payments may be higher, but they are not permanent. They are regular monthly draws for a specified period, usually a specific number of months.
In simple terms, longer terms will give smaller payments while shorter terms will give larger payments. For example, taking the homeowner’s net principal limit and drawing all of it in six monthly payments will have comparatively larger payments than drawing the same amount in equal monthly payments for 20 years. After the end of the term payment, the Reverse Mortgage remains active. The borrower can continue to inhabit the home, and the loan needs not be repaid once they continually adhere to the program’s procedure.
Modified Tenure and Modified Term
“Modified,” in this case, can be said to be a combination of a monthly payment with a line of credit. A “modified tenure,” therefore, is an adjusted tenure payment to give the homeowner a line of credit. A “modified term” is a term payment already adjusted to give the homeowner an LOC. If a homeowner desires a $25,000 line of credit established with a monthly payment, the regular monthly draw will reduce. The main benefit of the existing line of credit gives more flexibility and LOC growth that the homeowner would not have received with a regular monthly payment.
DID YOU KNOW
Repair escrows are only allowed for repairs up to 15% of the maximum claim amount.
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