The HECM loan (home equity conversion mortgage), often referred to as a reverse mortgage, gets a bad rap. But, it’s a powerful tool for many homeowners who are having a hard time paying their mortgage. It’s a great option for seniors who are looking to take out some of the equity in their home, in the event they need cash.
It’s important to understand how a HECM loan works, and what the positives are. So, let’s delve into some of the basics for those who are considering taking out a HECM loan on their home.
How HECM Loans Work
A reverse mortgage can be a great option for seniors and retirees, who are looking for a second stream or source of income on their home/equity. Although these mortgages have gotten a bad rap in years past, new regulations and government intervention, has made them far more attractive to those who are considering this option.
A reverse mortgage (or HECM) is the Federal Housing Administration’s reverse mortgage loan program. It works by
- Enabling seniors take out a second mortgage on their home so they receive cash in hand
- An origination fee is tied to a HECM loan (ranges from $2500 to $5000 on most homes)
- No monthly mortgage payments are required (insurance, taxes, and maintenance on home is required)
- Loans are repaid at time of move out or time of death
When people apply for a HECM loan, the funds can either be paid in a lump sum, through monthly payments, or as a line of credit.
Even with new regulations in place, some people are opposed to a HECM loans and reverse mortgages. We’re here to inform you that they’re a positive and powerful tool for many, and some of the reasons why you might want to consider one.
Benefits of a HECM Loans
There are numerous reasons you might want to take out a HECM loan on your home. If the property is in distress, needs major repair, or if you just need cash, you might be considering this option. Here are a few of the primary benefits that a HECM loan is going to deliver to you instantly.
Cash in Hand
You receive cash in monthly increments or as an upfront lump sum. Seniors and retirees who aren’t working full-time anymore, aren’t receiving a paycheck. Even with your pension, retirement savings, and other Social Security benefits, having additional cash in hand is a nice feeling. You can use it to pay bills, you can save it, or you can help family if you have kids in school or need help with finances. With a HECM loan, you instantly get paid for taking out a reverse mortgage on your home. And, since you eliminate the recurring monthly mortgage payment, there are many ways you can figure out how to spend that cash, or take the safer route, and invest it.
No Restrictions on Use of the Loan
It doesn’t matter how you choose to use the cash, it’s entirely up to the homeowner. Some homeowners might choose to make an investment in the property and upgrade it. Others will use the funds to pay the maintenance fees and property taxes, to take a much needed vacation, or as a form of savings, it’s the homeowner’s decision. And, some will use the money to put away for the future purchase of a new home, if they ever decide to leave the home and have to repay the mortgage owed on the property they are currently living in. There’s no restriction on how the money from a HECM loan can be utilized.
You Still Own Your Home
One of the most common misconceptions people have as it pertains to a HECM loan or reverse mortgage is that the lender takes ownership of your home. This isn’t true. You are still the owner of your home! So long as you are in compliance with the terms laid out in the reverse mortgage paperwork you sign, are making improvements on the home, are paying taxes, and insurance, you retain ownership of your home. Therefore, you can do what you choose to do to the home (as long as there aren’t restrictions in place in the contract regarding improvements or modifications to the home).
Continuing to pay your property taxes and insurance is critical to ensure compliance. So, make sure you are paying these expenses monthly and annually, and you’ll retain possession of your home under a HECM loan, as long as you live in it.
Protection from Housing Market Declines
The federal government insurers a HECM loan. This means if market values cause a huge dip in the price of local housing where you live, or in your property in general, you are not going to have to pay for it. What does this mean? Some benefits of federal government backing and security are
- If the reverse mortgage ends up costing more than the actual value of your home, you don’t pay for it
- The government will cover the difference in price if the property is less than the current market value at the time of sale
- The home will be paid in full using the proceeds which are drawn in from the sale, nothing more
Basically, if the property declines in value immensely, you don’t have to worry about how you’ll come up with the additional funds to repay the government. You are protected and insured under the terms of your HECM loan.
It’s Tax Free
A HECM loan is a loan meaning the money earned from it is typically tax free. It doesn’t matter if the homeowner chooses to receive it as a lump sum amount when they sign the loan or if they receive it in monthly increments, there are no tax penalties they will pay on that loan.
Low Risk of Decline in General
The low risk of housing market declines is just one of the benefits. It’s difficult for homeowners to run the risk of defaulting on their loan or mortgage if they don’t have to make monthly payments on it. Since you’re no longer paying a mortgage, you don’t run the risk of defaulting on this mortgage.
No More Mortgage Payments
You don’t have to pay a mortgage each month. You can utilize those funds to pay off an existing mortgage, credit cards, or other lines of credit that you have open instead. You repay the mortgage funds at the end of the reverse mortgage’s term, therefore, you can use the funds you would be using to pay your mortgage, for paying off other loans. Or, you can save these funds to increase your nest egg and retirement savings as you get older.
No Annual Fee and No Prepayment Penalties
There is no annual fee to keep the HECM loan open. There are no penalties on prepaying the loan early either. A HECM loan ends when the borrower moves or at the time of death. If a borrower plans on moving at a certain date, and chooses to prepay the loan early, they can do so.
Qualification is Easy
In fact, it’s much easier than it was when you first applied for and were approved for a mortgage. There aren’t major hoops to jump through when applying for a HECM loan. No monthly payments are required on the home. Therefore, even if you are limited in income, you are likely going to be approved for the reverse mortgage with most lenders you apply through as a homeowner.
Since your application isn’t solely based on your income or your credit score alone, the process is much easier for most applicants. Especially for seniors who are no longer working full time, and rely on investment accounts, savings bonds, and retirement accounts, as their major source of income at this point in their lives.
Extend Other Retirement Saving Lines
If you’re over 62, Social Security income is one of the primary source of income for your family. By delaying the receipt of those benefits, you can increase the amount you’ll receive anywhere from 6 to 8% in some cases. Many people don’t have that option. A HECM loan affords you that option since you’re receiving a steady stream of cash in one lump sum payout or as a line of credit. Utilizing the cash from your reverse mortgage also allows you to stop dipping into that 401(k) or other retirement and pension savings plans so early.
By extending the amount of time before you actually do apply for Social Security income and your retirement benefits, you’ll increase how much you eventually do receive, and you won’t have to pay taxes (on the retirement accounts) until you actually receive those benefits.
Regardless of where you are in life, a HECM loan is something you might want to consider. Especially for retirees or individuals nearing that age, it is a powerful tool to help increase equity in your home. And, if you know its the home you want to live in forever, it’s a great way to increase immediate cashflow, set aside retirement funds, and have the backing of a federally funded and government insured program, without having to make a monthly mortgage payment on your home. These are a few of the many great benefits that a HECM loan poses for homeowners who are debating if it is a good option for their family.