What Is a Home Equity Conversion Mortgage?
What Is a Home Equity Conversion Mortgage, For homeowners 62 and older, a Home Equity Conversion Mortgage (HECM) is a reverse mortgage that is government-insured.
Definition and Example of a Home Equity Conversion Mortgage
A reverse mortgage product with government insurance is called a “Home Equity Conversion Mortgage” (HECM). It enables those 62 years of age and older to be approved for a loan based on the equity they have in their house.
- Acronym: HECM
Banks that provide HECMs and have received approval from the Federal Housing Administration are where borrowers can submit an application (FHA). To learn more about these mortgages. And their other possibilities, applicants must undergo counseling from a counselor who the government has approved.
Consider that your house is worth $400,000 and that your current mortgage has $25,000 left to pay. Your lender determines that you qualify for a $300,000 HECM. The HECM settles your existing debt mortgage. And you receive payment for the remaining amount. You don’t have to make payments on the loan, but the interest due on the loan will increase the principal balance owed over time.
How Home Equity Conversion Mortgages Work
Your loan amount, if you are authorized for a Property Equity Conversion Mortgage, is based on the equity in your home. The age of the youngest borrower, and the current interest rate. You are not required to make payments during the loan term, although you are free to do so.
You have the option of receiving your HECM proceeds as a credit line, as monthly payments. Or as a lump sum. The loan sum will rise each month if you opt to get the money in regular installments. If you decide on a credit line, the debt will rise each time you take money from it and the loan will have an adjustable interest rate.
If you don’t pay, interest will continue to accrue added to the loan balance. And the loan is paid off when the home changes ownership. That means your estate will pay off the loan when you die. If you sell the house, the loan will need to be paid off.
How To Get a Home Equity Conversion Mortgage
The same sorts of bank lenders that offer conventional residential mortgages also offer home equity conversion mortgages. A bank should be permitted to perform HECMs as long as it has received FHA approval. To find out, go to your regular branch. In their absence of them, request a referral.
The following items are the requirements to qualify:
- Pre-application counseling
- Borrower age of 62 or older
- Home used as a primary residence
- Borrower approved as willing and able to make insurance and property tax payments
- Sufficient equity in the home
- Must live in a single-family home; one unit of a two- to four-unit home; a HUD-approved condominium; or a manufactured home that meets FHA requirements
- The borrower must not be delinquent on any federal debt
Pros and Cons of Home Equity Conversion Mortgages
Access to a stream of income: A home equity conversion mortgage can offer a dependable source of money for persons with low or no income to assist cover bills.
Enables homeowners to access their equity without having to sell: Borrowers can take advantage of their home’s value without having to sell it first and use the proceeds.
Interest adds up quickly: making HECMs troublesome if the rate is high. Or if you are only eligible for an adjustable rate. If you decide not to make payments, the cumulative interest can pile up very rapidly. And by the time you want or need to relocate, there might not be any equity left in the home. This will result in fewer assets for you and your heirs in the future.
Fees can add to your costs: You should also take into account the fees because they can raise your costs. Before you can even apply, you must pay for the pre-HECM counseling. The origination fee, which is capped at $6,000 by federal law, may be assessed by the lender when the loan is made. closing expenses like title insurance, appraisal costs, and inspections. And recording fees add up quickly and can end up being four, or even five, figures. The FHA also charges an upfront fee for the mortgage insurance premium (MIP). Those are just the upfront costs. Annual or monthly servicing charges and MIPs are also charged and added to the balance of the loan.
Alternatives to Home Equity Conversion Mortgages
One of the three kinds of reverse mortgages is the HECM. People who own their homes outright. Or have paid off the majority of their mortgage using each category. Single-purpose reverse mortgages and proprietary reverse mortgages are the other two varieties.
Single-Purpose Reverse Mortgages
Some state, local, and nonprofit entities provide single-purpose reverse mortgages. Although it is less expensive than the other two. This type is limited to a single usage, such as remodeling or home repairs.
Proprietary Reverse Mortgages
Private, uninsured reverse mortgages are known as proprietary reverse mortgages. Banks provide these programs, each with its own terms and conditions. A bespoke reverse mortgage with better terms and associated costs than a HECM may be available.
Because there is no government insurance of the collateral value, many proprietary reverse mortgages have this as their primary disadvantage. If the value of your home decreases, you can also be obliged to make loan payments. HECMs are insured by the FHA, so if the value of your property decreases, you won’t be responsible for the difference.
Is a Home Equity Conversion Mortgage a Good Idea?
A home equity conversion mortgage can be a good option for you if you need income or cash and have a lot of equity in your home but few or no other assets. Consider delaying a HECM until you actually need one if you have other assets you can use or a decent, consistent income now.