HECM/Reverse Mortgage Explained
What is the difference between a HECM and a Reverse Mortgage?
HECM (Home Equity Conversion Mortgage) is used for a new home purchase.
A Reverse Mortgage is a refinance of an existing mortgage.
Both can be used to assist seniors with living the retirement of their dreams.
A mortgage is a mortgage is a mortgage. Traditionally a person buys a house, finances it for 30 years; makes payments; and pays their property taxes & home-owners insurance. You can sell the house at any time and pay back the lender. As an owner (with a lien, of course), one can modify the house; paint the walls odd colors; install funky carpet and maybe even a swimming pool. A HECM is no different, except you don’t make mortgage payments, and at least one borrower must be age 62. It’s that simple!
“A no monthly mortgage payment*, home-equity loan for seniors.”
The HECM is an FHA program designed to help senior citizens live the retirement of their dreams by enabling them to buy their primary home with an approximately 50% down payment and then make no monthly mortgage payments for as long as they live in the home. It is one of the safest loans in America as it is federally insured.
How to qualify for a HECM: The lender (per FHA) doesn’t require monthly mortgage payments, just a financial assessment is required (rather than credit score) to determine eligibility. Borrowers need sufficient down payment funds, this is about 50% of the purchase price (or less) depending on the age of the youngest borrower. You must pay your property taxes and insurance.
Payments: As mentioned before, the borrower never has to make monthly mortgage payments* to the lender, for life. Even if life is 50+ years longer, or just 6 months – whatever “life” is, as long as the borrower maintains the house to lender/HUD standards; pays their property taxes & home-owners insurance, and lives in the property as their primary residence.
Funds to close: Prospective mortgagors must use their own money (money obtained from sale of assets, and/or sale of current home) for the required monetary investment.
- Checking / Savings account
- Sale of real estate including former home
- Gift from family
- Sale of assets such as investments
Safety and security: The Home Equity Conversation Mortgage (HECM),is fully FHA insured. What this means is; the FHA will insure the borrower’s funds are not impacted.
- If the home’s value at the time of settlement is less than the amount owed, the FHA will make up the loss (some restrictions apply of course).
- If the lender were to fail under the obligations of the contract, FHA will step-in to become the lender.
Reverse debt: Unlike traditional mortgages where the balance owed is decreasing with every mortgage payment, the HECM for Home Purchase has an increasing balance. In a normal economy the home usually increases in value, and thus the home’s equity grows larger. With a HECM for Home Purchase, the loan balance increases, but so does the home’s value, potentially maintaining or increasing home-equity despite the ever-increasing loan balance. Remember, the FHA will only allow about half of the appraised value to be borrowed.
- Closing costs for a HECM (origination fee, mortgage insurance premium, appraisal and other upfront costs). But these closing costs can be financed into the loan.
- If you are the only homeowner and you stay in an assisted living or nursing facility for more than 1 year, you will be required to repay the balance of the loan. You can always pay off the loan from the sale of your home, or by doing a refinance on the existing balance owed.
- Borrowers must keep their home in good repair, and pay property taxes and homeowners insurance. If you do not have enough money for these expenses, you could face foreclosure and lose your house.
Perceived disadvantage to heirs: The senior is “spending the kid’s inheritance”. But isn’t the home’s equity like an IRA that one pays into each year? Now it is time for the home to pay the senior – to enhance the retirement years.
Costs: We do not charge a deposit. You are responsible for paying the cost of your FHA appraisal and for the cost (if any) of HECM counseling. Most other fees are added to the loan balance, such as: title search; title insurance; local taxes; etc.. These are normal costs for any traditional mortgage. Also HUD charges a MIP fee of either .5% or 2.5%, depending on the percentage of funds you access.
This could be used as a downloadable PDF file:
Ways to Use a HECM
The New Home Equity Conversion Mortgage (HECM) is a versatile retirement funding tool that can be utilized in many ways. Here are just some of the ways to use a HECM:
- Buy your retirement dream home with half down and make no monthly mortgage payments on it.
- Pay off your forward mortgage to reduce your monthly expenses.
- Re-model your home to accommodate aging limitations.
- Maintain a line of credit (that grows) for health emergencies and surprises.
- Cover monthly expenses and hold on to other assets while their value continues to grow.
- Cover monthly expenses and avoid selling assets at depressed values.
- Pay for health insurance during early retirement years until Medicare eligible at 65.
- Pay your Medicare Part B and Part D costs.
- Combine life tenure payments with Social Security and income generated by assets to replace your salary and maintain your monthly routine of paying bills from new income.
- Pay for your children’s or grandchildren’s college or professional education.
- Maintain a “standby” cash reserve to get you through the ups and downs of investment markets and give you more flexibility
- Combine proceeds with sale of one home to buy a new home without a forward mortgage and monthly mortgage payments.
- Pay for long-term care needs
- Fill the gap in a retirement plan caused by lower than expected returns on your assets.
- Pay for short term in-home care or physical therapy following an accident or medical episode.
- Pay for a retirement plan, estate plan or a will.
- Convert a room or basement to a living facility for an aging parent, relative or caregiver.
- Set up transportation arrangements for when you are no longer comfortable driving.
- Create a set aside to pay real estate taxes and property insurance.
- Delay collecting Social Security benefit until it maxes out at age 70 1/2.
- Eliminate credit card debt and avoid building new credit debt.
- Cover monthly expenses in between jobs or during career transition without utilizing other saved assets.
- Cover expenses and avoid capital gains tax consequences of selling off other assets.
- Purchase health-related technology that enables you to live in home alone.
- Pay for an Uber or Lyft account so you have mobility and access to appointments and social activities.
- Help your adult children through family emergencies.