Who Is The HECM Reverse Mortgage Good For?
For the right person, the HECM reverse mortgage is an outstanding product. But it’s not for everyone.
It’s a special home loan designed to help homeowners trade some of their home equity for cash. For many people, mortgages like home equity loans, home equity lines of credit, and cash-out refinancing are better choices.
But for one group of borrowers, HECM loans are not just the best option — they are the only choice,
What Is The HECM Reverse Mortgage?
HECM stands for Home Equity Conversion Mortgage, and it’s pronounced “heck-em.” This reverse mortgage is government-backed and supervised by the Federal Housing Administration (FHA).
It’s also sometimes called the FHA reverse mortgage.
Reverse mortgages get their name because borrowers don’t make payments to lenders. Instead, lenders make payments to borrowers. The loan is repaid when the homeowner sells the property or leaves it to heirs.
The maximum loan amount depends on the borrower’s age, the amount of equity in the home and current interest rates. The money can be used for any purpose, such as paying down debt, home repairs, medical costs or just improving your lifestyle.
You can choose to receive monthly payments, a lump sum of cash or line of credit. The loan’s interest is added to its balance, so you don’t have to make payments.
When the home is sold, the loan is repaid, and the rest of the sale proceeds are paid to the homeowner or heirs.
Who Is The Ideal HECM Borrower?
The HECM is aimed at people 62 and older who own their homes, but don’t have enough money to maintain the lifestyle they want. It allows them to cash in some of their home equity without selling their property or making monthly mortgage payments.
HECM reverse mortgages can help homeowners who can’t qualify for cheaper financing like home equity loans because of credit problems or insufficient income.
One advantage of an HECM reverse mortgage is that borrowers with poor credit don’t pay higher interest rates than those with good credit.
Homeowners with mortgage balances may be able to wipe out their mortgage and payment with a HECM, freeing up more cash.
Homeowners who want a source of emergency cash can open up a HECM line of credit. They don’t pay interest unless they use it, but it’s available if they need extra money.
Borrowers who want to receive home health care can use the loan proceeds to cover the costs, and they can continue to live at home.
HECM Reverse Loan Requirements
Before applying for a HECM, you are required to attend a consumer information session with a HECM counselor approved by the Department of Housing and Urban Development (HUD).
You must be at least 62 years old, and you need to own the property free and clear, or have a mortgage balance small enough to be cleared by the reverse loan proceeds.
There is no minimum income or credit score requirement to get a HECM, but the lender must evaluate your ability to pay your property taxes, insurance and property maintenance.
If you don’t pass the evaluation, some of your proceeds will be held back by the lender, and it will pay your taxes and insurance for you.
HECM Borrower Concerns
It is important to consider your current health status when applying for a HECM reverse mortgage, because you need to have the loan for at least a few years to make it worth doing.
Reverse mortgages have some fairly high upfront mortgage insurance premiums, which are paid to the government. The longer you have your loan, the lower the cost of borrowing becomes.
If you decide to take a two-year jaunt around the world, you could be foreclosed for not living in your home after 12 months.
If you end up in a nursing home or assisted living facility, your house won’t be your primary residence, your HECM payments will stop and the loan will be terminated.
If you choose to move, for any reason, the HECM must be repaid. If you don’t have money to repay it, the property must be sold.
If you have non-borrowing family members living in the home, they could be evicted. However, the rules are different for non-borrowing spouses.
In most cases, a non-borrowing spouse could continue to live in the house after you die or leave. Your spouse would need to continue paying the taxes and insurance and keep up with the home maintenance.
To be protected from eviction, your spouse must be listed on the loan documents. His or her age is a factor in the amount you can borrow — the older your spouse, the more you can borrow.
The non-borrowing spouse must also be on the property title, or be added to the title within 90 days of the death of the borrower. Without ownership in the property, he or she can be evicted and the property sold.
You and your spouse must be legally married when the reverse mortgage closes. (Exceptions apply for same-sex couples prohibited under state law from being legally married.)
The surviving spouse must be living in the home when the reverse mortgage is originated.
The surviving spouse must continue to treat the home as a primary residence.
Reverse Mortgage Heirs
For some people, leaving an inheritance to their heirs is very important. Drawing down equity with a HECM reverse mortgage means there may be fewer assets to leave to your loved ones.
Your heirs will have to pay off the reverse mortgage if they want to keep the house. If they choose to sell, the proceeds will go to pay off the loan. Money left over will go to your heirs.
While some people embrace HECM reverse mortgages as a tool to improve their cash flow, others caution that these loan products should be used only as a last resort.
At any rate, it is important to understand why you might want to obtain a reverse loan and what that will mean for your finances.
What Are Today’s Home Equity Mortgage Rates?
Home equity loans and cash out refinances are cheaper alternatives to reverse mortgages, for those who qualify. Find out if you can take advantage of these programs, and the rates available to you.