what is hecm loan

What is HECM Loan? Complete Guide to Home Equity Conversion Mortgage Loans

What is HECM loan? HECM stands for Home Equity Conversion Mortgage, which allows senior citizens to extract useful income out of their home equity. In HECM mortgage, the mortgagor’s home becomes collateral, and the loan is repayable only when the borrower stops living in the mortgaged property either because they are dead or has moved elsewhere.

You can spend the money you receive through HECM on anything, but you still need to pay the taxes on time and continue working on the upkeep of your house.

Difference Between HECM Mortgage and Traditional Mortgage

In a traditional mortgage, your equity increases as you continue repaying the loan you borrowed. The objective behind paying off both the principal and the interest is to eventually become the complete owner of your residence.

Meanwhile, HECM mortgage lets you borrow funds based on your existing home equity. A majority of the elderly own their home, but unfortunately, many do not know that their largest asset could easily be a good source of their retirement income. Although you do not have to pay monthly after HECMing your property, the loan amount increases rather than decreasing with time.

In a traditional mortgage, the bank or the lenders disburse the entire amount in one go right at the beginning to enable the borrower to buy a house, whereas, HECM mortgage entails multiple facilities. You can procure a lump sum, go for monthly payments, and even borrow more if need be.

Again, monthly repayments characterize standard mortgages, and you may even be required to pay the outstanding balance in the end. One of the USPs of a reverse mortgage is the lenders reclaim their money just once, i.e. after the borrower vacates the mortgaged property or passes away.

Modus Operandi

Home Equity Conversion Mortgage is entirely devoid of complexities, as far as, the way it works is concerned. Factors such as your age, interest rate, and the value of your property will determine the total loan amount. Older owners with costlier homes will have a bigger borrowing limit.

Interestingly, if you are married or have a co-applicant, the age of your spouse or the co-borrower will determine the quantum of the principal amount.

As far as disbursal is concerned, line of credit , monthly payout, and lump sum are the three available options.

Features

 HECM mortgage has excellent features, some of which are as follows:

  • If your loan eventually exceeds the value of your home, you will not have to pay the difference.
  • Depending on the payment option you go for, you may eventually end up paying zilch for as long as you mortgage your property.
  • There is no tenure, and the lenders will come to reclaim their money only when you decide to dispose of or vacate your property.
  • The interest rate can vary, as frequently as every month.

Benefits

 Advantages galore in the case of HECM Mortgage and you will surely have more reasons than one when you decide to reverse mortgage your residential property. Here are some of the key benefits that you can avail:

  • One of the primary reasons why homeowners go for HECM mortgage is to pay off an existing traditional mortgage. By doing so, they ensure the responsibility of making monthly payments does not weigh on their mind.
  • Your children or any other heir can easily inherit your property post your death by paying off the loan.
  • Repaying the loan only at the end of the term will mean you will have funds for unforeseen expenditures such as medical emergencies.
  • HECM makes for a fantastic arrangement. You will get to live in your own home comfortably and enjoy a steady income as well. If the loan amount exceeds the financial worth of your property after your demise, federal insurance will pay off the difference.
  • It is entirely tax-free, and you will pay nothing to the government.
  • Lastly, even if God forbid, you depart all of a sudden, your spouse or co-borrower will continue to avail all the benefits that this scheme comprises.

Eligibility

  It is not just you who has to be qualified to seek HECM mortgage loan. Your property too must meet specific criteria, and there are some other obligations that you need to be mindful of.

Some of the crucial eligibility requirements vis-à-vis HECM mortgage are as follows:

  • You need to be 62 years old.
  • Without at least equity, you will not be eligible.
  • You need to live in the house you wish to mortgage for a significant part of the year.
  • Yours should be a single-family or multiple-family home or an FHA-approved condominium to stand a chance of being reverse mortgaged.
  • Traditional mortgage and the one under discussion do not go hand in hand. To enjoy the perks of the latter, you will have to cessate the former for good.
  • Lastly, you need to continue paying your association fees and insurance premium even after you manage to obtain a loan through HECM

Costs and Fees 

 There will be some one-time upfront costs when you eventually get your loan. Like other mortgages, HECM mortgage too comprises origination fees, mortgage insurance premium, closing costs, etc. and you can pay these through the funds you get as a mortgagor.

Interests, serving fees, and premiums will keep on getting added to the previous month’s balance, and if the overall amount exceeds your home’s value, your insurance will come to your aid here.

 Downsides

While the pros no doubt exceed the cons when you talk of HECM mortgage, you can mull other alternatives if you wish to leave behind an inheritance for your progeny and sans any financial burden at that. Again, the prospect of losing your entire home equity could make you hesitant.

The bottom line is HECM Mortgage has been created to allow the aged to spend their twilight years in peace by utilizing their most valuable asset. It could ably serve your purpose provided you consider all its aspects and use it wisely.