Fri. Jun 9th, 2023

home equity conversion mortgage

Home Equity Conversion Mortgage (HECM) Benefits and Costs

A home equity conversion mortgage (HECM) is a type of reverse mortgage that offers a number of benefits for homeowners. It can be used to pay for expenses or help with retirement savings.

HECMs are federally insured by FHA and have strict qualifications and requirements. However, they can be confusing and may not be the best choice for everyone.

HECM Benefits

HECM benefits are a great way for older homeowners to leverage their home equity. However, it’s important to understand all of the costs involved before you decide if a HECM is right for your needs.

You can use HECM funds for anything from medical expenses to house repairs or travel. And because HECM payments aren’t considered income, they won’t affect your Social Security or Medicare benefits. But you should also talk to a benefits counselor or bring this up in your HECM counseling session, as every state has different rules on how a reverse mortgage can impact your eligibility for Medicaid or Supplemental Security Income (SSI).

Another advantage of HECM is that you’ll never owe more on it than your home is worth. This is a significant benefit for homeowners who are concerned that their home’s value could decline in the future, especially if they live in an expensive area or have a lot of heirlooms.

In addition to allowing you to utilize your home’s equity, a HECM loan can be used as a retirement investment and source of extra income. You can pay off your HECM loan with a lump sum, monthly payments or a line of credit.

But keep in mind that HECM fees and interest rates can be high, so it’s important to know the full cost before you make a decision. Additionally, it’s not a good idea to take out a HECM unless you’re sure you’ll need the money.

The HECM program is sponsored by the Federal Housing Administration, so you can’t get one from a bank or other financial institution that is not a FHA-approved lender. The FHA has a wealth of information online, as well as resources available at the federal and state level to help borrowers with questions and provide guidance for existing HECM borrowers.

HECM counselors are trained to answer your questions and help you find the resources you need. You can search for a HUD-approved HECM counselor online or ask the counselor you’re working with for a listing of certified counselors near you.

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HECM counselors aren’t required to be HECM roster counselors, but most do have experience with reverse mortgage loans and can refer you to the FHA or HUD for more detailed guidance on this topic. They can also help you complete a HECM application or provide you with additional options for funding your HECM loan.

HECM Eligibility

The home equity conversion mortgage (HECM) is a government-insured loan that can be obtained by borrowers who are 62 years or older. The program allows homeowners to use a portion of their home’s equity to pay for expenses such as medical bills, renovations and other costs that might arise later in life.

Eligibility for a HECM is based on the homeowner’s age and the amount of home equity available in the property. If you are eligible, the program can provide you with a lump sum or monthly payments. You can also get a line of credit that you can draw on as needed.

In order to qualify for a HECM, your home must meet certain HUD requirements and be FHA-insured. This includes single-family homes, townhouses or Planned Unit Developments (PUDs), condominiums and 2-to-4 unit homes that are owner-occupied. You must also live in the property for at least one year before you can obtain a HECM.

Another requirement for HECM eligibility is that the home is your primary residence. HECM loans are not eligible for vacation homes or secondary residences, and they are also not eligible for land on which your home is located.

HECMs are non-recourse loans, meaning that you cannot owe more money than the value of your home at the time of repayment. However, if the value of your home drops significantly, you could find yourself in financial trouble.

A HECM can be used to purchase a new home or to refinance your existing home. When a borrower purchases a new home, the lender will usually require a down payment. The rest of the funds for the purchase come from a HECM loan.

Reverse mortgages are regulated by the Federal Housing Administration, so the program is safe and secure for homeowners. They also offer a variety of options and flexible repayment terms that are not available with traditional mortgages.

When you apply for a reverse mortgage, you will be required to attend a counseling session with a third-party, HUD-approved counselor. The counselor will help you decide if a HECM is the right option for you, and will also explain your rights and responsibilities as a borrower.

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HECM Costs

Home equity conversion mortgage (HECM) costs can add up quickly. You’ll need to consider upfront costs as well as ongoing fees that you might incur during the loan process.

One of the biggest HECM costs is the initial fee for mortgage insurance, which the FHA charges to guarantee its reverse mortgage loans. This fee is 2% of the home’s appraised value at closing.

Other costs associated with HECMs include appraisal, title search and insurance, surveys, inspections, recording fees and mortgage taxes. These fees should be similar to those you would pay on a standard first mortgage, but they may vary from lender to lender.

You’ll also need to pay out-of-pocket HECM counseling fees, which are required by HUD. This counseling session ensures you understand how the loan works, the costs involved and any other finance options available to you.

HECM counseling can cost up to $200, lasts about 90 minutes and can be done in person or over the phone. It’s important to do this before you make a decision to take out a HECM, since it’s an important financial commitment.

Another cost that’s worth considering is the servicing fee, which can be added to your loan balance as you receive your monthly payments. This fee is calculated on a monthly basis, and it’s paid from your HECM proceeds.

A HECM typically offers lower interest rates than other types of reverse mortgages, so you can save money in the long run. However, your interest rate will depend on the current market and the type of mortgage you take out.

It’s a good idea to shop around for the best HECM interest rates before you decide on one. This will help you find the most affordable way to use the home’s equity for your needs.

The HECM process can be complicated and confusing, so it’s helpful to work with an experienced HECM specialist who will guide you through the entire process. They can also help you identify a lender with a strong track record and low fees. They can also explain the pros and cons of each HECM option and answer any questions you might have.

HECM Options

Homeowners with a home equity conversion mortgage (HECM) can choose from multiple options to use the proceeds. They can choose to receive their proceeds in a lump sum, monthly payments or as a credit line.

HECM borrowers can also take advantage of the HECM for Purchase program to buy a new home using a combination of proceeds and equity from their existing property. This program is available to homeowners who are age 62 or older and allows them to purchase a home without paying cash for the home, but does require buyers to meet HUD’s credit requirements and be current on property taxes and insurance.

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As with any reverse mortgage, HECM is a complex and potentially confusing financial option that should be researched carefully before you apply for it. A licensed advisor can guide you through the process and ensure that you understand all of your obligations and the terms of the loan.

The most common HECM type is the FHA HECM, and it is available through a limited number of FHA-approved lenders. It is a government-insured home loan, and it protects borrowers from losing their homes if their home values fall.

In addition, HECM offers many protections to both borrowers and lenders. These include the non-recource feature, which means that borrowers never owe more on their loans than their homes are worth at the time of sale. The FHA also insures the borrower against losses that occur during the life of the HECM, as well as a lender’s guarantee that they will be paid the full amount of their loans should they default on them.

While there are a variety of other types of reverse mortgages, including proprietary mortgages offered by private banks, HECM is the most commonly used. This is because it has the most robust government-insured protections, and because HECM lenders have stricter regulations than proprietary reverse mortgage lenders.

It is also the most flexible reverse mortgage option because it can be received in a variety of ways. Borrowers can choose to receive their proceeds as a lump sum, monthly payments or as an adjustable line of credit with an interest rate that is based on the market.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.