Home Equity - Reverse Mortgage (HECM)
Reverse Mortgage
What is a Home Equity Conversion Mortgage (HECM)? A Home Equity Conversion Mortgage (or HECM, commonly called a reverse mortgage) is a home-secured loan, specifically designed for homeowners 62 and older, that enables the borrower to convert a portion of their home equity into cash and defer repayment until a later date.
How a HECM Works: With a traditional mortgage, the flow of funds generally moves from the borrower’s bank account to the lender. Naturally, as the borrower makes payments, the loan balance decreases over time. With a HECM, the flow of funds is typically reversed—the lender or servicer is the one making the payments to the borrower. A good way to think of it is that lender is giving the borrower an advance on the borrower’s home equity. The borrower’s age, the interest rate, and the home value all factor into how much of the home’s equity the borrower can initially access with a HECM. Of course, a HECM is not free money. Just like a traditional mortgage, with a HECM, the borrower must repay the borrowed amount, plus interest and fees. However, a HECM offers the borrower much greater repayment flexibility compared to a traditional mortgage—it is a feature that can help the borrower to increase their cash flow in retirement. The borrower can choose to pay as much or as little toward the HECM loan balance each month as they would like—or they can choose to make no monthly mortgage payments at all—for so long as they occupy the home as their primary residence and pay the property-related taxes, insurance, and upkeep expenses.
The HECM loan becomes due when one of the following maturity events occurs:
*The property is no longer the principal residence of at least one borrower. For example, a HECM would become due if the last remaining borrower passed away or permanently moved to a nursing home. (Note: The due and payable status of the loan may be deferred in certain situations in which an eligible non-borrowing spouse is involved.)
*A borrower does not fulfill their obligations under the terms of the loan. For example, a HECM would become due if the borrower failed to pay their property taxes in a timely manner—a requirement for compliance with the loan terms. When the HECM loan becomes due, it is typically satisfied through the sale of the home on the open market. If the price that the home sells for is not enough to pay back the loan balance, the FHA guarantees that neither the borrower nor their heirs will be personally liable to pay the difference. This is known as the loan’s non-recourse feature. On the flip side, if the home sells for more than the loan balance, the borrower (or the heirs) will be able to keep the difference. And, if the heirs choose to purchase the home themselves, they can by paying the full loan balance amount, up to 95 percent of the property’s appraised value. HECM Eligibility
*Age: The borrower must be age 62 or older
*Home ownership: The borrower must be the owner of the home and the home must have significant equity (e.g., the borrower owns the home free and clear, or the mortgage balance has been substantially paid down).
Residency: The home must be the borrower’s primary residence. (They must live in the home for more than 6 months out of every year.)
Credit requirements: The borrower must meet minimum credit requirements.* (There is no minimum credit score requirement and the income requirements tend to be less stringent than a traditional mortgage.)
Note: This financial tool is not appropriate for all seniors. Please seek out professional advice prior to entering into any financial agreement.