Reverse mortgages are home loan products that help seniors boost their retirement cash flow and stay financially afloat. A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage and can be used in many ways. Read on to learn more about how they work, key benefits and drawbacks, how to determine if you’re eligible and where to apply.
What is Home Equity Conversion Mortgage (HECM)?
Backed by the Federal Housing Administration (FHA), a HECM loan is a mortgage product that lets seniors 62 years of age or older tap into their home equity. If approved, the HECM loan will pay off your current mortgage (if applicable), and any remaining proceeds from the sale will be disbursed to you.
You’ll no longer have mortgage payments, but the homeowners’ insurance premiums and property taxes are your responsibility until you pass away or leave your home. Any home maintenance is also your responsibility.
Borrowers have the option to make principal and interest payments. But if you decide not to, principal and interest will be added to the total outstanding loan balance. The loan becomes due when you vacate the property or pass away. After that, your home will be sold to take care of the loan, or your heirs can pay off the reverse mortgage or refinance it to keep the house.
How Does Home Equity Conversion Mortgage (HECM) Work?
Traditional mortgages require you to make monthly principal and interest payments over a set number of years. So as your balance decreases, the amount of equity you have in your home increases. But HECMs work the opposite way – the lender pays you, so the outstanding balance increases over time and the equity declines.
You can choose from the following payment options:
- Lump sum payment
- Monthly payments for the life of the loan (adjustable-rate HECMs only)
- Line of credit (adjustable-rate HECM only)
- Customizable option (adjustable-rate HECM only)
What is The Difference Between a Home Equity Conversion Mortgage (HECM) and a Reverse Mortgage?
HECMs are a type of reverse mortgage insured by the FHA. However, there are also other types of reverse mortgages that aren’t backed by the FHA or disbursed through FHA-approved lenders.
Pros of a Home Equity Conversion Mortgage (HECM)
- You’ll retain possession of the home if you make homeowners insurance and property tax payments.
- There are almost no restrictions on how the proceeds from a reverse mortgage can be used.
- Monthly mortgage payments aren’t mandatory.
- You don’t need perfect credit to qualify since the lender doesn’t consider your credit score when deciding if you are eligible for a loan.
- The reverse mortgage loan proceeds are tax-free.
Cons of a Home Equity Conversion Mortgage (HECM)
- You could lose your home to foreclosure if you fail to abide by the loan agreement.
- You must stay in the house for most of the year or risk the loan becoming payable immediately.
- Upfront HECM costs are generally steep.
- Your heirs may miss out on the opportunity to inherit the home.
- You could run out of money before you pass away.
- You’ll pay mortgage insurance premiums for the life of the loan.
Who Qualifies for a Home Equity Conversion Mortgage (HECM)?
You may qualify for a HECM if you meet the following eligibility criteria:
- You are at least 62 years old.
- You have sufficient equity in your home.
- You use your home as your primary residence.
- You have a mortgage on your home or own it outright.
How to Apply for a Home Equity Conversion Mortgage (HECM)
Before applying for a HECM, you’re required by HUD to complete a reverse mortgage counseling session with a HUD-approved, third-party counseling provider. An in-depth financial assessment is also mandatory to confirm you can afford to maintain the home and cover homeowners insurance and property tax bills.
Should You Get a Home Equity Conversion Mortgage (HECM)?
If you have a nice amount of equity in your home and want to access it and eliminate your monthly mortgage payment, a HECM could be a good fit. You can get the cash you need in a lump sum or over time to live comfortably in retirement while remaining in your home. Plus, good credit isn’t required to qualify for a loan.
Where to Get a Reverse Mortgage
A quick online search of reverse mortgage lenders will yield several results. But with so many to choose from, how do you know which are best?
American Advisors Group is a lender that deserves to be at the top of your list. It’s the leading HECM originator in the U.S., and customer satisfaction and flexible funding solutions are at the forefront of its mission. Answer a few questions today to request a free no-obligation information kit or connect with a home equity specialist.