April 20, 2016 by HECM Pro
You may have heard or seen the acronym in commercials or online, but what is a HECM exactly? How does it work?
HECM (which is often pronounced heck-um by industry insiders) stands for Home Equity Conversion Mortgage, which is the most common reverse mortgage product in the United States. If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM program was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. Today, the program is overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 HECM reverse mortgages are written every year in America today and the number is set to grow significantly in the future.
What is a HECM and How Does it Work?
The HECM reverse mortgage program is designed to give seniors 62 years of age or older access to a large portion of their home value without having to take on a mortgage payment or give up ownership of the home. HECM proceeds can be used to:
- Eliminate existing mortgage payments
- Eliminate other debts, such as credit cards and auto loans
- Finance home improvements
- Supplement retirement income
- Pay off medical bills
- Increase liquid retirement assets
- Set up a rainy day or emergency fund
- Take a vacation
Monthly payments are not required and the loan does not need to be repaid as long as one borrower is living in the home.
A Unique Mortgage Product
The HECM is unique mortgage product that is designed specifically to give you easy access to the huge savings account you have called home equity. It’s a good bet you spent many years working hard, making mortgage payments, and maintaining your home, right? The HECM is designed to give you a return on that investment so that you can live better in your retirement years.
The following are some notable features of the HECM program:
- No monthly payments are required and the loan does not need to be repaid as long as at least one borrower is living in the home.
- You remain the owner of the home and are free to will it to your heirs.
- Loan proceeds can be taken as a lump sum payout, credit line, monthly term or tenure payment, or some combination of all three.
- Loan proceeds are not subject to income taxes and do not impact Social Security or Medicare benefits.
- The HECM is a non-recourse loan, meaning you, your estate, or your heirs will never have to repay any more than the value of the home regardless of how much you borrow.
- The HECM program was created by the federal government and is insured and regulated by FHA.
Your obligations under the HECM program are simply to pay your real estate taxes, homeowners insurance, and live in the home as your primary residence. As long as you do these things, no monthly mortgage payment is required and the loan does not have to be repaid.
There’s a lot of misconceptions and misinformation floating around out there about the reverse mortgage. The following are a few of the most common ones:
Misconception #1: “I’m giving up ownership of my home.”
Not at all. A reverse mortgage is fundamentally just a home loan, but one designed to give you access to your equity without having to sell the home or take on a monthly payment. Like a traditional forward mortgage, you always retain title ownership of the home. You are not selling your home to the bank when you get a reverse mortgage.
Misconception #2: “The reverse mortgage will use up all of my equity.”
A reverse mortgage is designed to convert equity into cash over time, yes, however, the goal is also to preserve equity. It is not a healthy program if it uses up your equity quickly.
Misconception #3: “I’ll be passing on a big debt to my heirs.”
The reverse mortgage is a non recourse loan, which means that a debt can never be passed on to your heirs. If there’s not enough value in the home to pay off the entire balance, you or your heirs are not responsible to cover the shortage. The program is insured against that.
Misconception #4: “Reverse mortgage interest rates are sky high.”
Not at all. In fact, HECM reverse mortgage rates are often comparable to traditional mortgage rates.
Is a Reverse Mortgage Right for You?
Whether or not the HECM reverse mortgage is the right option for you depends on your goals and plans for the future.
The following are some scenarios where the reverse mortgage may not make sense:
- You plan to move in the near future. Though there is no limitation on selling and moving when you have a reverse mortgage, the program is better suited to people who plan to stay in their homes for the foreseeable future.
- You desire to pass the maximum equity you can to your heirs. The reverse mortgage is designed to convert equity into cash over time, so if your goal is to preserve or build as much equity as you can, then it probably doesn’t make sense for you.
- You have young children or somebody with disabilities living with you and you want them to continue living in the home if you pass. The reverse mortgage becomes due and payable once the last borrower has passed away or permanently moved out of the house. If you have other people living with you who won’t be capable of paying off or refinancing the reverse mortgage, it could result in them having to move out of the home. Having said that, you may be able to protect against this with a life insurance policy or other assets that are adequate to pay off the reverse mortgage.
However, if you’re over 62, a homeowner, and you plan to live in your home for the foreseeable future, a HECM reverse mortgage could be a great option. As long as you have a good amount of equity in your home, it’s possible to convert it into cash that can substantially improve your lifestyle.
Check out next: How Does a HECM Reverse Mortgage Work?