Understanding Home Equity Conversion Mortgages

The reverse mortgage program has been around for many years.  In 1989 HUD (the Department of Housing and Urban Development) insured their first one.  Since then nearly 800,000 government-insured reverse mortgages, named Home Equity Conversion Mortgage, or HECM for short, have been utilized.

HECM is a loan that is available for homeowners’ age 62 or higher.  It enables homeowners to access some of the equity in their home without having to make a payment on the loan, and the loan proceeds are tax-free.  That translates into extra cash-flow for the homeowner who is typically on a fixed income.  This is how it achieves what it was originally designed to do, which is helping older homeowners remain in their homes for as long as they want to.

Since its initial design the uses of this unique program have grown.  Much of this is due to HUD’s introduction of the HECM Saver in 2010, a lower closing cost option.  Financial planners can use it as a risk management tool to extend the life of clients’ portfolios.  It can reduce retirement or disability risks by funding a long-term care policy.  Others may use it to bridge an income gap and delay social security in order to maximize that life-long benefit, or simply supplement social security income.  Debt payment reduction is another application that helps free up cash flow and improve a senior’s lifestyle.  Also, the HECM for Purchase is used when a senior is ready to Purchase a more suitable retirement home.  The senior brings roughly 20-50% of the purchase price to the closing while the HECM provides the remaining 50-80%, depending upon how much they qualify for.  So they can buy their home bringing much less cash to close and still not have a mortgage payment.

Homeowners are still responsible for staying current on their property taxes, homeowners’ insurance, and the upkeep of their home.  Loan proceeds can be taken in a lump sum, line of credit, or monthly payment, or a combination of these.  Any liens or loans on the property need to be paid off at the closing with the HECM loan proceeds.  The loan comes due once the homeowners no longer live in their home.  Ownership of the home does not change and the heirs can still keep the home if they choose to.

Reverse mortgage counseling is one of the consumer protection measures of this program.  Everyone that applies for a HECM must complete the counseling requirement.  Also, this is a non-recourse loan which protects the homeowners and their estate from any liability to themselves.  The property itself is guaranteed to satisfy the payback of the loan.

The HECM is a flexible and potentially powerful financial tool that should be carefully considered along with any sound retirement plan.  Understand its various options so that it can be correctly applied to your unique situation and you get the maximum benefit possible.

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