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.
A few potential HECM loans benefits include:
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:
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:
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:
These are some of the most common questions we receive from our clients during the HECM application process.
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:
Eventually, the loan will need to be repaid. Repayment is triggered when:
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.
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.
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.