November 15, 2016
There are two types of FHA loans borrowers should know about when considering their refinance loan options. One is a traditional cash-out or no cash-out refinance loan, and the other is a reverse mortgage, also known as an FHA HECM loan. HECM stands for Home Equity Conversion Mortgage.
The standard refinance loan and FHA HECM options are very different and serve different needs, but depending on the borrower it may be good to be familiar with both.
Typical FHA refinance loans involve situations where the borrower typically has an existing mortgage and applies for a new loan that pays off the original mortgage, creating a brand new monthly payment, loan term, etc.
Depending on the terms of the loan cash back may or may not happen, but for cash-out refinancing the money due back to the borrower is what remains once the original loan is paid, plus any applicable funding fees and expenses.
The situation is different for FHA HECM loans. HECM loans (reverse mortgages) are intended for qualified borrowers age 62 or older who either own their homes outright or are very close to paying off the loan.
That is one major difference, as typical refinancing (non-reverse mortgages) don’t have an age requirement.
The reverse mortgage is also different than the typical refinance loan because there is no monthly mortgage payment with HECMs.
A HECM loan is paid in full when the borrower dies or sells the property. Unlike FHA refinance loans, a HECM loan requires all parties to be obligated on the FHA HECM to receive reverse mortgage loan counseling as a condition of loan approval.
Reverse mortgages, like cash-out or no-cash-out loans, may be available on both fixed-rate loans and adjustable-rate mortgages. The amount of cash to the borrower and the terms of those payments will vary depending on whether the borrower chooses a fixed rate HECM or an adjustable rate FHA HECM.
Some borrowers know immediately that they want a reverse mortgage or a more typical refinance loan. But if you aren’t sure which is right for you, a conversation with a participating FHA lender may be a very good idea.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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