A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage loan that allows borrowers to convert equity into tax-free funds or monthly cash flow, eliminate payments on their current mortgage, or purchase a home without monthly mortgage payments. Home Equity Conversion Mortgage allows senior citizens to obtain a loan based on the value of their homes. Home Equity Conversion Mortgage is only the reverse mortgage that is insured by the Federal Housing Administration (FHA) and borrowers can only get these mortgage loans through the FHA-approved lenders.
The Home Equity Conversion Mortgage (HECM) is available as an adjustable-rate mortgage or a fixed-rate mortgage loan. A Home Equity Conversion Mortgage is insured by FHA and allows people aged 62 and older to tap into the portion of their equity. There are three different types of Reverse mortgages as Single-Purpose Reverse mortgages, Home Equity Conversion mortgages, and Proprietary reverse mortgages. A Home Equity Conversion Mortgage (HECM) provides various protections for homeowners and offers the most flexible way to receive and use their funds.
A Home Equity Conversion Mortgage (HECM) helps many homeowners and has guidelines to protract borrowers, this financial option is not always the best one. Home Equity Conversion Mortgage (HECM) makes up the majority of the reverse mortgage market. Home Equity Conversion Mortgage (HECM) terms are often better than those of proprietary reverse mortgages, however, the maximum loan amount is limited and mortgage insurance premium is required.
What Is Home Equity Conversion Mortgage (HECM)?
The Home Equity Conversion Mortgage (HECM) is a Reverse Mortgage Loan that is insured by the Federal Housing Administration (FHA) for Borrowers aged 62 years old. The Home Equity Conversion Mortgage (HECM) is a Government-insured Mortgage Loan that allows homeowners to convert their home equity into cash. The Home Equity Conversion Mortgage (HECM) first pays off the existing mortgage loan, if there is one then the rest of the money can be used for anything and there are no longer monthly mortgage payments needed. However, Homeowners are still responsible for paying their property tax, and homeowners insurance and must continue to maintain the Home. The Monthly loan payments are optional, however, the borrowers can opt to make monthly payments since there are no prepayment penalties on Home Equity Conversion Mortgage (HECM).
How Does Home Equity Conversion Mortgage (HECM) Work?
The Home Equity Conversion Mortgage (HECM) is the most popular type of Reverse Mortgage Loan. Home Equity Conversion Mortgage (HECM), typically offers lower interest rates for borrowers. Many types of reverse mortgages will exclusively target seniors with no requirements for repayments until the borrower sells their home or dies. A Home Equity Conversion Mortgage (HECM) can also be considered in comparison to home equity loans. A home equity loan is not dissimilar to a reverse mortgage loan, since the borrowers are issued a cash advance based on the equity value of their home, which acts like collateral.
A Home Equity Conversion Mortgage (HECM) supplements borrowers’ income during retirement. The eligible borrowers can apply for the HECM Mortgage Loan by talking with the HUD-approved counselor and receiving an offer. The amount of money they can borrow depends on the age of both the borrowers and their spouses, even if they are not on the loan as well as the current interest rates the home’s appraised value, and current mortgage limits.
What Are The Benefits of Home Equity Conversion Mortgage (HECM)?
Here are some of the Benefits of a Home Equity Conversion Mortgage (HECM):
- Increased Cash Flow: The borrowers can access cash from a portion of home equity without paying taxes.
- Flexible Repayment Features: The borrowers have the option to repay as much as little of the loan balance every month that they like, or they can make no monthly mortgage payments at all.
- No-recourse Features: With the Home Equity Conversion Mortgage (HECM), the unused portion of the line of credit will grow each month at the same rate as the loan balance.
What Is the Eligibility To Apply For the Home Equity Conversion Mortgage (HECM)?
In order to Apply for the Home Equity Conversion Mortgage (HECM), a Borrower must meet all the requirements set by FHA. These Are:
- The Eligible borrower’s age must be 62 years old.
- The borrowers need to own the property or have paid down a considerable amount.
- The Borrowers must have substantial home equity.
- The Borrowers not be delinquent on any federal debt.
- The Eligible borrowers must have the financial capability to continue to make timely payments of ongoing property charges including property taxes, insurance, Homeowner association fees, etc.
- The borrowers must complete the reverse mortgage counseling with the U.S. Department of Housing and Urban Development (HUD)-an approved counselor to make sure to understand how the HECM works.
In addition, the property needs to be one of the following:
- A Single-family Home or two-to-four-unit home with one unit occupied by the Borrower.
- A HUD-or FHA-approved Condominium
- A Manufactured Home that Meets the FHA Requirements.
How To Apply For Home Equity Conversion Mortgage (HECM)?
In Order to Apply for the Home Equity Conversion Mortgage (HECM), eligible borrowers need to follow these step-by-step Guidelines:
- Identify HUD Approved Lenders: The eligible borrowers need to select their State and HECM option as the “Service-originator type”. They can use the HUD’s lender list tool. The Borrowers can also search by name of the lender, and more specific areas such as radius around the city or country.
- Research about the Lenders: Now search for the HUD-approved lenders in your area online. You can at look what they offer, browse consumer reviews, and check out any complaints filed against them on the Consumer Financial Protection Bureau database.
- Contact some Lenders: Most of the HECM lenders don’t allow you to apply directly on their website. Instead to this, the borrowers can fill out a form for them to contact the lenders.
- Apply With any of the Lenders: The lender will ensure to meet the basic eligibility requirements to officially apply for an HECM the guide you through the desired process. However, the borrowers can communicate with a mortgage planner over the phone, via email, or in person.
- Attend the counseling session: The eligible borrowers must attend a pre-purchase counseling session with a HUD-approved counselor. They need to clarify their financial plan, give advice, and connect the additional resources.
- Review and Select the offer: Finally, review any offer, choose the best HECM, and sign on the dotted line.
Home Equity Conversion Mortgage (HECM) Reviews
Reverse Mortgage Loans are complex loans and there is careful consideration is required before applying. Understanding the Home Equity Conversion Mortgage (HECM) Pros and Cons helps individuals to know about it. A Reverse Mortgage is a great addition to borrowers’ retirement plans for several reasons. Here below are some Pros and cons of Home Equity Conversion Mortgage (HECM) Mortgage Loans:
Pros:
- The Borrowers can eliminate their monthly mortgage payments.
- The HECM Beneficiary remains the owner of the home.
- When considering the HECM Mortgage Loans their Credit score is not a factor.
- The Home Equity Conversion Mortgage (HECM) mortgage loans are insured by FHA, borrowers are better protected from declining home values.
Cons:
- Home Equity Conversion Mortgage (HECM) Mortgage Loans typically have higher fees than traditional mortgage Loans.
- In case a medical emergency or other incident requires you out of the home for the majority of the year, The HECM Mortgage loan could come due.
- If the borrowers select the payment plan that doesn’t last the life of the loan, then they could outlive their proceeds.
Frequently Asked Questions (FAQs)
Question 1: What Is the Difference between HECM and Reverse Mortgage?
Answer: All Home Equity Conversion Mortgages (HECM) are Reverse Mortgages but not all Reverse Mortgages are HECM. A Home Equity Conversion Mortgage (HECM) is a Reverse Mortgage backed by FAH and issued by FAH-approved lenders.
Question 2: Are Home Equity Conversion Mortgage (HECM) Expensive?
Answer: Yes, Home Equity Conversion Mortgage (HECM) carries very high origination, mortgage insurance premiums, and maintenance fees.
The Bottom Lines
A Home Equity Conversion Mortgage (HECM) allows senior citizens to use the equity in their home while paying off their existing mortgage. The Home Equity Conversion Mortgage (HECM) mortgage loan is Insured by the government and can be used to supplement borrowers’ retirement income, but the mortgage can be complex and isn’t always the right option for everyone.
