The Definition of HECM Reverse Mortgage
In This Article We Will Discuss The:
Definition of a HECM or Home Equity Conversion Mortgage
The only Reverse Mortgage that is the Federal Government insures is the Home Equity Conversion Mortgage (HECM). These non-recourse loans can be offered at low interest rates and as substantial financing terms by the lenders due to their involvement. “Federal Government” refers to HUD and FHA.
HUD: US. Department of Housing and Urban Development
FHA: Federal Housing Administration (a Division of HUD)
Apart from insuring HECM loans, they also regulate the HECM program in conjunction with the Consumer Financial Protection Bureau (CFPB). The lender, the homeowner, the homeowner’s beneficiaries, and the spouses of borrowers have all favored HECMs. Owing to the popularity of the HECM, only a few proprietary Reverse Mortgage products are offered.
What makes HECMs appealing?
The Federal Housing Administration (FHA) presents the mortgage insurance without an input of profit margin. In simple terms, the government does not aim at making any money from insuring them. The interest rates will be higher if a lender self-insures a non-recourse loan. Else, the lender will offer less money to homeowners.
Here Is a Fun Fact:
Federal benefits, including Social Security are generally not affected by Reverse Mortgage Proceeds. In order to understand exactly how they will be affected, we recommend that all of our customers consult their Federal benefits administrators or financial advisors.
WHY A HECM IS GOOD
For home buying: A pensioner can boost buying power when purchasing a new home by using the “Reverse Mortgage for Purchase.”
For financial planning: A Reverse Mortgage can be used to extend a retirement portfolio, improve net wealth, and give a respite to a retiree.
For insurance purposes: When the values of the home decline, the Reverse Mortgage serves as a form of insurance and protects the homeowner if they live longer than their retirement funds.
For accessing home equity: The Reserve Mortgage can serve as means of earning regular monthly income.
Did You Know?
Borrowers do NOT need to own their home “free and clear” in order to qualify for a Reverse Mortgage. In fact, the most common use is to pay off existing mortgages.
WHY YOU SHOULD AVOID A HECM
The HECM is not suitable for every retired homeowner. Here are few of the reasons:
If the homeowner wishes to move or sell the home
The primary purpose of the HECM is to provide a place for older homeowners to age over a long time. Consequently, it is not suitable for those who intend to move out of the home within a short period or sell the home.
If it has no positive effect on their financial status
If the Reverse Mortgage has little or no beneficial effects to the homeowner, incurring an expense for it would be not only unethical but also imprudent.
If it doesn’t address their crucial issue
It is beneficial for some homeowners to pay off an existing forward mortgage because it improves their financial condition and leaves a monthly budget deficit for them. If it fails to resolve their financial crisis, a Reverse Mortgage can hurt both the borrower and the lender.
If the homeowner lacks an adequate understanding of the product
Several pensioners are NOT used to managing their finances. Furthermore, they may be suffering from some illnesses or have competency issues which could hinder their full understanding of the loan they are applying for.
If it endangers a dependent’s housing
The loan usually becomes due and payable the moment the borrower stops occupying the home. Other options should be considered if no plans are made for a family member living in the home.
Section 255 of the National Housing Act (12 U.S.C. 1715z–20)
This section aims at authorizing the Secretary to run a mortgage insurance program that is designed to cater to the particular needs of elderly homeowners by alleviating the effect of the economic hardship that resulted from the rising costs of meeting subsistence, health, and housing needs at a time of reduced income, as a consequence of the insurance of home equity conversion mortgages to allow the conversion of a portion of accrued home equity into liquid assets.
HUD Handbook 4235.1 Chapter 1-2. PURPOSE OF THE PROGRAM
The program insures Reverse Mortgages and is designed to allow elderly homeowners earn monthly streams of income from the conversion of the equity in their homes.
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