What is a HECM Reverse Mortgage?
The Federally Insured Home Equity Conversion Mortgage (HECM), the Federal Housing Administration (FHA) and the U.S. Department of Urban Development’s new name for the reverse mortgage, accounts for 98% of all reverse mortgages today.
So it’s important to realize that when commercials and marketing material mention reverse mortgages, they’re talking about the Federally Insured Home Equity Conversion Reverse Mortgage or HECM.
A HECM reverse mortgage can be a retirement tool. There is no reason to jump to conclusions that a HECM reverse mortgage is bad. As a matter of fact, for many retirees, the HECM reverse mortgage pros far outweigh the cons. Learn more about what reverse mortgages are.
One common HECM reverse mortgage myth is that children whose parents are considering the reverse mortgage will see their inheritance may dwindle away if mom or dad takes 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.
Take a look at some of the other pros and cons of HECMs.
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 a 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 a 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.
Uses of a HECM
In addition to understanding the HECM program pros and cons, it’s helpful to know what you can do with the money. You can use your HECM to:
- Eliminate your mortgage payments by paying off your current mortgage.
- Tap into your home’s equity through a line of credit.
- Protect your spouse from a loss of income after a death or divorce.
- Minimize the chance of outliving your assets.
- Get cash to maximize your Social Security benefits by deferring the start date.
- 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.
Cons of HECM
Some of the potential disadvantages of getting a HECM include:
- You have to live in your home: When you get a HECM, your property must be your principal residence for much of the year. You’ll have to pay back the HECM if you sell the home or want to move. Just like with a traditional mortgage.
- There’s a minimum age: The youngest borrower needs to be at least 62-years-old to qualify for a HECM. In other words, if you’re 65 and your spouse and co-owner is 60, you need to wait for them to turn 62 before applying for a HECM.
- You need to take care of your home and pay taxes: You’ll have to pay real estate taxes on your property. You’ll also need to maintain the home and contribute to its upkeep. No different than what you are currently doing.
- 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 a 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 a HECM.
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Apply for a 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 a HECM today.