The HECM and REVERSE MORTGAGE What are they?
HECM and REVERSE MORTGAGE
What is a Reverse Mortgage?
A reverse mortgage is a home loan that allows seniors 62 years or better to convert the equity in their home into cash without having to repay the loan. The only requirements are that they live in their home as their principal residence, maintain the home and pay their taxes and insurance on the property.
Home Equity Conversion Mortgage, also known as HECM loans are reverse mortgages that are insured by the Federal Housing Administration (FHA) which is part of the U.S. Department of Housing and Urban Development (HUD).
The borrower does not have any limitation* on how they use the reverse mortgage proceeds. They can use them to pay for medical expenses, home repairs, travel or other living expenses.
In clear language, a Reverse Mortgage is a process whereby a home secures a loan, and the repayment is scheduled to a later date. A Reverse Mortgage is usually repaid when the home is sold in the future. Therefore, a Reverse Mortgage does not have to be planned as an FHA-insured Home Equity Conversion Mortgage (HECM), the main subject of discussion in this content.
In certain circumstances, a municipality or state can offer Reverse Mortgages as a “Single-Purpose Reverse Mortgage” to address the necessity to repair the home or pay property taxes by the homeowner. Also, a non-profit organization can offer it to cater to issues like medical care. A legal claim is, therefore, established in the home, and the lender is fully repaid when the home is sold in the future.
Besides, lenders may offer “Proprietary Reverse Mortgages,” which are not FHA-Insured. They are not common; however, they are expected to become prominent in the coming years. For the rest of this discussion, a “Reverse Mortgage” is assumed to mean the FHA-Insured Loan product that consists of the bulk of Reverse Mortgages offered nationally.
There are two primary reasons for using the word “REVERSE”:
- Flow of Money- The Flow of Money Mostly Moves in Reverse
Monies on traditional mortgages flow FROM the bank account of a borrower TO the account of the lender or servicer. However, Reverse Mortgages can move funds in a lump sum or monthly installments FROM a lender or servicer back TO the borrower.
- Loan Balance- Loan Balances Tend to Move in Reverse
Here’s a fun fact!
The first known reverse mortgage in the United States was made in 1961 by Deering Savings & Loan
The bulk of traditional mortgages involves principal and interest payments. This REDUCES the loan balance. The loan balance, however, INCREASES when the payments are not required.
Since the flow of money mostly moves in reverse, and the loan balances also move in reverse, it is evident why this type of loan is referred to as a Reverse Mortgage. Nevertheless, a Reverse Mortgage does not necessarily function in this way.
Increasingly homeowners understand that to meet a particular immediate financial need, the Reverse Mortgage can transform a portion of home equity into cash. It is an efficient way of helping people who are “house rich, but cash poor,” and it is used to “cash out” home equity during a financial crisis. A financial problem can be stabilized by accessing home equity with a Reverse Mortgage. Moreover, it can be used to buy a home.
Here’s a fun fact!
Great Britain originally developed reverse mortgages in the 1930s
However, draws against home equity do not have to occur straight away. In reality, they do not necessarily have to occur. Even if the homeowner does not have a financial crisis, there are financial reasons that could necessitate obtaining a Reverse Mortgage. Other reasons for obtaining one apart from the product’s traditional use will be explored. For instance, a homeowner at age 62 could establish a growing line of credit (LOC) that could surpass the value of the home with reference to the market conditions.
Besides being an excellent means of accessing funds at any time, it is also helpful in financial planning. The homeowner can have the growing line of credit (LOC) converted into monthly payments for extra retirement income, to foot long-term health care bills, or to access funds from the LOC when the retirement portfolio has been depleted. The need for this approach becomes clearer by considering these statements:
No one can be sure of how long we would live.
You can't be positive of your financial needs throughout your retirement.
You can’t be positive your retirement funds will last throughout your retirement.
Older homeowners are prone to the risk of running out of funds due to long life, unexpected financial pressures, or poor performance of their retirement portfolio. A Reverse Mortgage can be used in several ways. An option is to cash out a portion of the home’s equity. Another option is to use the purchase option to move to a new primary residence. Moreover, in agreement with the advice of financial planners, it can be used as a financial planning tool for greater security and future cash flow options.
As you can observe, homeowners are best prepared to diversify their home equity and manage the risks of home ownership during retirement by converting their loan balances into an HECM and establishing a line of credit.
If you are of age 62 or more and in need to funds to finance home repairs, offset current mortgage, increase your retirement income, or settle healthcare bills, you can consider a Reverse Mortgage. It is a product that makes possible the conversion of the part of the home equity into cash without the need of selling your home or pay extra monthly bills.