If you’re a senior looking to enjoy retirement, a HECM loan can be an effective way to maintain your lifestyle and make the most of your golden years. To help you understand whether a home equity conversion mortgage (HECM) is right for you, we’ve compiled a brief summary of what you need to know.
What is a HECM?
A HECM is commonly known as a reverse mortgage. It is a special type of home equity loan for seniors (over 62) that is backed by the government and supervised by the Federal Housing Administration (FHA).
What does a HECM entail?
- Is borrowed against the value of a home
- Has associated costs, including an origination fee, servicing fees, FHA mortgage insurance, and closing costs
- May be taken out even if a mortgage is not paid in full
- Can be accessed as a lump sum, monthly payments, or a line of credit
- Is available only to those 62 years and older
- Must be paid in full when the home is sold or the borrower(s) die or move out of the home
- With a substantial down payment, can be used in lieu of a traditional mortgage when buying a new home
When is a HECM loan useful?
A HECM loan is useful for retired adults in several different situations.
- You have considerable equity in your home and immediate cash flow needs but don’t qualify for other financing options like commercial home equity loans or lines of credit.
- You have considerable assets to put down on a new home, but you don’t want a monthly mortgage payment.
- You have enough equity in your current home to make a significant down payment on your new home. This can be helpful in eliminating a mortgage as you move into a higher value “dream home.”
With a reverse mortgage, more homeowners are able to access cash from their home equity, allowing them greater freedom to live their retirement as they wish—without racking up credit card debt. This can help relieve the financial stress that can come with the loss of employment income.
Who is eligible for a HECM loan?
All applicants must be at least 62 years of age, and the HECM loan is available only on the homeowner’s primary residence. The property borrowed against must have sufficient equity to merit the loan. A more detailed list of HECM borrower requirements is available on the U.S. Housing and Urban Development website.
Is a HECM loan right for me?
For some seniors, reverse mortgages are invaluable for eliminating monthly mortgage payments, covering medical costs, or augmenting available income. A HECM loan can provide a number of benefits, including
- Eliminating a mortgage payment
- A 5% loan discount for heirs in the event of the owner’s death
- No risk of an “upside down” loan left to heirs
- While the loan is taken out on a portion of the home’s value, appreciation is on 100% of the home’s value (which, depending on market conditions, may cover the cost of interest)
- An easy approval process with no credit check necessary
Before applying for a HECM loan, however, it’s critical that you understand how it will affect you. Prior to submitting your application, you must meet with a HUD-approved HECM counselor to ensure you understand important information about these loans, such as
- Borrower responsibilities
- Tax implications
- Alternatives to reverse mortgages
- Warnings about scams
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