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What You Need to Know About HECM Loans

Keys to Doors II

Reverse mortgages have been around since the 1960s. Although they have evolved and changed over the last 50 years, their purpose remains the same: to help seniors use their home equity as collateral.

When a senior applies for and secures a reverse mortgage, they are able to borrow against a portion of the equity in their owned property. This can empower them to fully use their wealth and enjoy their retirement, rather than leaving their equity tied up in their current home.

There are a few different types of reverse mortgages, but the most common option is the Home Equity Conversion Mortgage (HECM). This kind of government-insured loan allows senior homeowners to convert their home equity into cash, which they can use for their own purposes.

However, not everyone qualifies for HECM loans – and it might not be the right kind of loan for your particular situation. 

If you’re over the age of 62, here’s what you need to know about HECMs.

What Is a Home Equity Conversion Mortgage? 

The Home Equity Conversion Mortgage is offered by the Federal Housing Administration (FHA). It allows borrowers to choose how to withdraw their home equity funds, either in fixed monthly amounts, as a line of credit, or as a combination of both. 

HECM borrowers can also use the loan to purchase a primary residence if they already have the cash on hand to pay the difference between the HECM proceed amount and the home’s sale price.

To qualify for a HECM, the borrower must…

  • Be at least 62 years of age
  • Own their property outright (or have a low mortgage balance)
  • Occupy the property as a principal residence
  • Not be delinquent on any federal debt 

Additionally, all HECM borrowers must participate in a consumer information session, provided by an  approved HECM counselor, such as our team at NeighborWorks Orange County. 

To learn if your home qualifies for a Home Equity Conversion Mortgage, you can use an online eligibility checker, or give us a call. 

How Is a HECM Different From Other Reverse Mortgages? 

There are three kinds of reverse mortgages that provide home equity for seniors

  1. HECMs
  2. Single-purpose reverse mortgages
  3. Proprietary reverse mortgages

The key difference with a HECM is that it is the only government-issued option, which makes it substantially less risky. 

Additionally, a HECM is not the same as a traditional home equity loan. With a HECM, monthly payments on the loan are optional (unless certain requirements are not met). The HECM also offers more ways to receive the proceeds in comparison to most loans. 

The Top Reasons to Get a HECM 

As you assess your reverse mortgage options, it’s important to carefully consider their benefits and drawbacks. Here are some of the possible pros of getting a HECM: 

  • You can use the proceeds for anything. There are no restrictions on your use of the funds, so you can do things like consolidate your debt, supplement your income, conduct home renovations, or even buy a second property. In many cases, the HECM simply offers some extra breathing room for seniors living on retirement income.
  • There are no monthly payments. Essentially, borrowers are able to eliminate their monthly mortgage payment by replacing it with the loan – or they can pay off the loan amount whenever they decide to sell the home. 
  • You don’t need a certain credit score. HECM eligibility is only determined by financial assets, income, and living expenses. 
  • The title remains in your name. You’ll still be the owner of your property and can decide to sell it at any time. 
  • There are no income taxes on HECM proceeds. If you decide to supplement your income with the loan, you won’t need to pay extra taxes. 

Are There Any Downsides to Getting a HECM? 

Despite all of the benefits of HECMs, there are some potential cons, including that… 

  • You will still need to live in the home. The property must continue to be your primary residence, even if you purchase a second home.
  • You will need to maintain the home and pay your real estate taxes. This isn’t really any different than what you’re likely doing now, but you cannot shirk your homeowner responsibilities once you’ve received the HECM proceeds.
  • You might lose government aid. If you are currently receiving money from Supplement Social Security or Medicaid, you might lose that aid after supplementing your income with a HECM. This is a deal-breaker for some seniors.

How to Choose the Right Kind of Reverse Mortgage 

No matter what kind of reverse mortgage you’re leaning toward, you need to fully evaluate the option and understand its consequences. There’s no one “best” choice – it all depends on individual seniors’ circumstances and financial situations.

The HECM might be the most popular type of reverse mortgage, but it’s not the only one out there. Some seniors opt for a proprietary reverse mortgage, as it is a private loan and often gives a large loan advance. Others choose a single-reverse mortgage, as it’s generally the least expensive option.

Ultimately, you’ll need to determine how you plan to use the money and what you want from your reverse mortgage. It’s also a smart idea to speak with lending professionals to ensure you’re covering all of your bases. 

Get Help From a HUD Certified Counselor

Neighborhood Works Orange County has been offering HECM counseling services since 2016. As a community-led nonprofit organization, we’re committed to equipping Southern Californians with the top educational tools. Your home should be something that helps you build wealth, not a liability. 

If you are 62+ seeking HECM counseling, we are here to assist.

Ultimately, our goal is to ensure you’re making an informed decision when it comes to using your home’s equity. All of our sessions are entirely virtual, so anyone can attend from the comfort of their home. 

If a HECM is right for you, we’ll issue you a certificate at the end of your counseling appointment. This certificate will be valid for six months.

Ready to get the ball rolling? Register for HECM counseling today.

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