What Is a Home Equity Conversion Mortgage or HECM?
If you are 62 or older and your home is paid off, you may have heard about reverse mortgages. One type of reverse mortgage is called a home equity conversion mortgage (HECM) that is backed by the Federal Housing Administration (FHA). A home equity conversion mortgage allows old Americans to covert their home equity into cash. Learn all about HECM loans below, and speak to one of our helpful loan professionals if you have questions about obtaining a mortgage.
The amount that you can borrow with a home equity conversion mortgage is based on your home’s current market value, and you need to be at least 62. Money is advanced to you against the value of the home, and interest accrues on the balance that is owed. However, no mortgage payments are made until the home is sold, the borrower passes on, or the borrower moves from the property.
How an HECM Loan Works
A home equity conversion mortgage is one of the more popular kinds of reverse mortgages. Generally, the terms for FHA reverse mortgages vary with private reverse mortgage companies, and it may be possible to borrower more money with lower costs than HECMs. However, HECM loans usually provide lower interest rates. Whether an HECM works for you depends on the circumstances, including your age, how long you live, and expect to keep the home. There are some reverse mortgages on the market that target seniors and there are no repayment requirements until the owner sells the property or dies.
You can think about a home equity conversion mortgage in comparison to a home equity loan. A home equity loan bears some resemblance to an HECMs; borrowers are given a cash advance according to the value of the home, which is collateral. A key difference with a home equity loan, however, is the funds must be paid back each month. The HECM loan doesn’t require you to make payments every month, but there are costs related to the servicing and closing of the loan. The borrower also has to pay for mortgage insurance. These fees and premiums can be rolled into your loan, but it reduces the amount of equity you can borrow.
You can receive the money from your HECM in several ways:
• Lump sum
• Monthly payments
• Line of credit
• Monthly payouts and a line of credit
If you take a lump sum, it has a fixed interest rate, while your other options have a variable rate. Regardless of the option you select, you can use your loan proceeds however you wish. The amount you receive depends on your home’s value, your age, and reverse mortgage rates.
Eligibility For HECM Program
The FHA backs the HECM mortgage and offers insurance for the loans. The FHA also has established guidelines and eligibility for these FHA reverse mortgages. The borrower can only get this type of reverse mortgage from a lender where FHA backs the product. To get an HECM, you need to fil out a standard FHA application. For approval of your loan, you must meet these qualifications:
• Be at least 62
• Own the property outright or have paid off most of the mortgage
• Live in the property most of the year
• Not be behind on federal tax debt
• Have the ability to make on-time payments for insurance, taxes, and HOA fees.
• Attend a consumer information session sponsored by HUD
An HECM is a type of reverse mortgage backed by the FHA, but not every reverse mortgage is an HECM. HECMs are administered by the FHA and must be obtained through an FHA-approved mortgage lender.
What Are The Costs Of an HECM Loan?
Most of the costs of your HECM can be financed, so you may not have excessive upfront costs. However, financing the loan’s costs means reducing the amount of money you receive. The loan has several charges and fees to be aware of:
• Mortgage insurance: You will have to pay for FHA mortgage insurance. The insurance ensures that you will receive the loan advances you expect. The mortgage insurance premium can be financed as part of the reverse mortgage.
• Third-party charges: Closing costs can include title search, appraisal, insurance, inspections, recording fees, credit checks, and mortgage taxes.
• Origination fee: You must pay a loan origination fee to pay the lender for processing the reverse mortgage. The lender can charge either $2,500 or 2% of the initial $200,000, whichever is greater, plus 1% of the loan over $200,000.
• Servicing fee: The lender and its agents service the loan each month, which includes giving you an account statement, disbursing the loan proceeds, and ensuring that you keep up with the loan requirements. The lender can charge you up to $30 per month.
Consider an HECM Line Of Credit
Like any type of mortgage, an HECM has risks. One of them is that shady mortgage companies have been known to scam older Americans out of their equity. However, this type of reverse mortgage has benefits for some borrowers, and can be a valuable tool to supplement your income in your older years. The HECM is not like the traditional HELOC Loan. Talk with an HECM lender about the differences between a regular HELOC and the HECM line of credit.
Some financial experts recommend an HECM line of credit. Many say that seniors should establish one as soon as they are eligible. Even if you don’t need your line of credit today, it will grow over time and give you a valuable source of retirement income.
For instance, you could take your equity with an HECM line of credit if you need money to pay for medical costs or living expenses. You will not pay any interest until you tap the line of credit.
HECM Review
An HECM can be a valuable financial tool for homeowners 62 or older who have paid off their mortgage. If you are eligible, you can borrow some of your equity in a lump sum or monthly payments to help with living expenses, medical bills, home improvements, and more.
However, there are disadvantages to getting a reverse mortgage, so you should talk to a financial advisor to decide if this type of reverse mortgage is a fit for you. One of our loan advisors can talk to you today about your various reverse mortgage options.