HECM Credit Line – Pros and Cons

What Is a Home Equity Conversion Mortgage?

The Home Equity Conversion Mortgage (HECM) is the leading type of reverse mortgage in the United States. It’s federally insured through the Federal Housing Administration (FHA). This unique type of mortgage allows older adults 62 years of age or older who already own a home to exchange the equity in their property for a cash payout.

When commercials and marketing materials mention reverse mortgages, they’re talking about the Federally Insured Home Equity Conversion Reverse Mortgage or HECM. An HECM reverse mortgage can be an excellent retirement tool, as it offers an extra source of income for retired homeowners who need assistance making ends meet. For many retirees, the HECM reverse mortgage pros far outweigh the cons. Learn more about what reverse mortgages are.

HECMs often offer benefits in taxes, inheritance planning and financial security. However, they are not for everyone, as there are some guidelines and regulations you must meet for the duration of your loan. Take a look at some of the pros and cons of Home Equity Conversion Mortgages and see whether it’s an option for you.

Pros of HECMs

A few potential HECM loans benefits include:

• No required monthly payment: Payments are completely optional — you can pay interest only, principal and interest or no payment at all.
• No minimum credit score: There are no credit score requirements to qualify.
• You can use the money for any purpose: There are no restrictions on how you spend the money you get from your HECM.
• No tax: You don’t have to pay income tax on the money from your HECM.
• Offers retirement protection: You can get guaranteed income for life with an HECM, provided you remain in your home. During a market downturn, you won’t have to worry about pulling from your retirement accounts.
• HECM programs are federally mandated: The terms of an HECM reverse mortgage and associated expenses are consistent across the country.
• FHA-insured: The FHA insures all HECMs. If your mortgage is more than your home’s value, the FHA protects you.
• You retain 100% ownership of the home: When it’s time to sell your home, any remaining equity after paying the mortgage belongs to you. If your heirs sell the property after your death, they can keep the remaining equity. They also have up to 12 months to pay off the loan after you pass.

Learn More About HECMS

Cons of HECMs

Many of the disadvantages of this reverse mortgage loan are related to eligibility requirements. To qualify for an HECM in the first place, you must:

• Be at least 62 years old. If you and your spouse are applying together, you both must be 62.
• Live in the home as your primary residence and keep up with any maintenance.
• Be current on all debt payments and have the means to maintain all property-related payments, including insurance and property taxes.

If you fit these qualifications, an HECM is probably a good fit for you! Still, approach this process with care, and keep in mind that:

• There are a lot of reverse mortgage scams: Be on your guard when applying for a reverse mortgage, as some are less legitimate than others. Be cautious of signing anything unless you fully understand the terms. It’s a good idea to work with a licensed advisor like Senior Lending when going through the process. Your advisor will help you understand your obligations and the rules of HECMs.
• You might lose government aid: While an HECM isn’t counted as income for tax reasons, the money you receive from your HECM can affect your ability to qualify for Supplemental Security Income or Medicaid. Carefully consider the effects of losing your benefits if you were to take out an HECM.

Uses of an HECM

In addition to understanding the HECM program pros and cons, it’s helpful to know what you can do with the money. Once you’re approved for an HECM, you can receive the money in a lump sum, through monthly payments or over an as-needed credit line. After you have it, though, you can use it for pretty much anything. Some of the most common ways people use their payout is to:

• Pay off their current mortgage.
• Pay off other debts.
• Pay down property taxes and homeowner’s insurance.
• Pay for home repairs or renovations.
• Pay for modifications to your home that let you age in place.
• Pay for in-home care.
• Provide an advanced inheritance to your heirs.
• Cover the cost of traveling or checking off “bucket list” items.

Frequently Asked Questions

These are some of the most common questions we receive from our clients during the HECM application process.

What Are the Eligibility Requirements for an HECM?

Along with the age and living requirements we discussed above, the property you’re using for the HECM also has to meet certain qualifications. Be sure your house is:

• A single-family home, two-unit home or four-unit home
• A condominium that meets FHA approval
• A manufactured home that falls under FHA requirements

Do I Have to Pay Back an HECM? 

Eventually, the loan will need to be repaid. Repayment is triggered when:

• The borrower sells or moves out of the home
• The borrower (or the last borrower) dies

At this time, the loan needs to be repaid in full. In many cases, this involves the loaner taking the home in question, but there are quite a few options for repayment if the family chooses to keep the property. Talk to your loan servicer to decide on the best solution.

Will an HECM Affect Inheritances?

One common HECM reverse mortgage myth is that children whose parents are considering the reverse mortgage will see their inheritance dwindle away if their parents take out such a mortgage.

In fact, using up home equity instead of spending more IRA assets can actually preserve more wealth for heirs. In some cases, it can also provide additional tax benefits for heirs.

For example, if the parents dictate legally they want the home to go to the kids for a future sale, the heirs will inherit the tax deduction for accumulated unpaid interest. This is one of many unknown HECM advantages.

Apply for an HECM With Senior Lending

As you can obviously see, the pros outweigh the cons when it comes to the new and improved FHA-Insured HECM Credit Line. So when the time comes to make a decision regarding whether you should or shouldn’t move forward with the HECM Credit Line, make a list of pros and cons and compare it to your current mortgage situation. The results just might surprise you from your preconceived notions of reverse mortgages.

Learn more about how to qualify and apply for an HECM today.

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