HECM is the acronym for a Home Equity Conversion Mortgage commonly known as a reverse mortgage. A reverse mortgage is pretty much exactly what it sounds like: a loan borrowed against the equity to your home, but instead of making traditional monthly payments, the bank reversely pays you. At the end of the term, whether you move out or die, the bank takes the property to pay the remainder of the loan. As long as the borrower remains in their home, they do not have to make any payments to the bank.
While the loan is regulated by the U.S. Department of Housing and Urban Development, an HECM is not a government loan. In the past, reverse mortgages have been falsely advertised as part of the economic stimulus plan; stay away from any companies claiming these loans are government benefits. Reverse mortgages are unique in that they can only be given to homeowners aged 62 years or older. Reverse mortgages have been around for a while, but have gained a considerable amount of popularity in recent years. Generally, funds help people pay for basic living expenses and health care, but there is no stipulation on what the money can buy. While this sounds great, there are some things prospective buyers should be aware of.
Reverse Mortgage Pros:
The Federal Housing Administration, part of HUD, charges the borrower an insurance fee of 1.25% the loan balance. The loan balance increases by the amount of this fee. The borrower is protected if the lender is not able to make a payment, or, if the value of the home upon selling is not enough to clear the loan balance.
The borrower is not required to make monthly payments to the lender as long as the house remains lived in and up to date with property tax, home insurance, etc.
Money can be used at the borrower’s discretion and can be received as a lump sum, a monthly payment, or as a line of credit.
It allows homeowners to draw equity out of their houses while remaining in the home. The maximum amount for 2014 is $625,000 with interest rates around 2% for variable rates and 5% for fixed rates.
Reverse Mortgage Cons:
With a reverse mortgage, the house no longer goes to heirs, but rather to the bank when the homeowner passes away. The only way it would go to the heirs is if they pay off the balance of the home at the time of death.
Reverse mortgage fees can reach up to 4% even if the borrower opened the mortgage as a line of credit without using the funds.
The lender can call the loan at any time if the homeowner stops paying property taxes, insurance, or moves into an age-oriented facility for a full year.
Most experts recommend using reverse mortgages with care and only when necessary. If you don’t have children or don’t mind losing your house after death, then there should be no problem funding your retirement through a reverse mortgage.