Navigating the complex landscape of home financing can be a daunting task. Two terms that often emerge in discussions about senior home financing are “HECM” and “Reverse Mortgage.” At first glance, these may seem interchangeable, but are they?
This blog post will delve into what HECM is, its eligibility criteria, how it functions, and its differentiation from a regular reverse mortgage. Additionally, we’ll explore the risks and alternatives.
What is HECM?
HECM stands for Home Equity Conversion Mortgage. It’s a specific type of reverse mortgage insured by the U.S. federal government and is exclusively offered through approved Federal Housing Administration (FHA) lenders. The primary purpose of a HECM is to allow seniors to convert a portion of their home’s equity into cash, which can be utilized for any purpose.
Who is eligible for Home Equity Conversion Mortgages (HECM)?
Eligibility for HECM is straightforward. The youngest borrower must be at least 62 years old. The borrower must either own the home outright or have a low mortgage balance which can be paid off during the HECM loan process. The home must be the primary residence for the borrower. It can be a single-family home, a 2-4 unit property with one unit occupied by the borrower, or an approved condominium or manufactured home. Finally, the lender must assess the borrower’s ability to meet their financial obligations, including property taxes and homeowner’s insurance.
How Does Home Equity Conversion Mortgage Work?
Once approved for a HECM, borrowers can choose how they wish to receive their funds – as a lump sum, monthly payments, a line of credit, or a combination thereof. As with any loan, interest will accumulate over time on the amount borrowed. Unlike traditional mortgages, monthly payments aren’t required. Instead, the full loan balance becomes due when the last surviving borrower sells the home, permanently moves out, or passes away. Due to its federal insurance, even if the loan balance surpasses the home’s value, the repayment will never exceed the home’s sale price.
What Is the Difference Between a HECM and a Reverse Mortgage?
While all HECMs are reverse mortgages, not all reverse mortgages are HECMs. Think of HECM as a subset within the broader category of reverse mortgages. HECMs are federally insured by the U.S. government through the FHA. In contrast, private lenders might offer proprietary reverse mortgages that aren’t federally insured. HECMs have loan limits set by the FHA, while proprietary reverse mortgages might allow for larger loan amounts, especially with high-value homes. Moreover, while HECMs have specific criteria set by the FHA, proprietary reverse mortgages can have varying criteria depending on the lender.
Can You Lose Your Home with a HECM?
With a HECM, you still retain the title and ownership of your home. However, risks exist. If borrowers fail to pay property taxes, homeowner’s insurance, or maintain the property, the loan can become due and payable. If the borrower leaves the property for more than 12 consecutive months, for example, moving to a nursing home, the loan becomes due. Furthermore, if the property is sold, the proceeds first go toward repaying the HECM before any remainder goes to the homeowner or heirs. It’s important to note that the “non-recourse” feature ensures that neither the borrowers nor their heirs will owe more than the home’s sale price, even if the loan balance exceeds it.
HECM Alternatives
If a HECM doesn’t seem like the right fit, consider a proprietary reverse mortgage offered by private lenders, which can be a good choice for homes exceeding FHA’s limits. Alternatively, a home equity loan or line of credit is a more traditional route and requires monthly repayments. If maintaining the current home is a financial burden, consider selling and purchasing a more affordable home or renting. Some local governments also offer deferred payment loans to assist with property tax payments, which can ease financial pressures for seniors.
Conclusion
In essence, while HECMs are a type of reverse mortgage, they come with unique federal backing, specifications, and benefits. For seniors seeking financial flexibility, they can be an invaluable tool. Yet, as with all financial decisions, it’s essential to conduct thorough research, understand all implications, and consult with professionals to determine the best course of action tailored to individual needs.