What is a HECM loan?
Is a type of reverse mortgage that allows seniors to convert the equity in their home into cash to purchase a new home or to simply use the equity for other purposes.
Definition of a HECM loan
A HECM is a reverse mortgage insured by the Federal Housing Administration (FHA). Unlike a conventional mortgage, where you make monthly payments to build equity, a HECM allows you to draw on your home equity without giving up the title to your home. The loan is repaid when the last surviving homeowner sells the home, passes away, or moves to a different principal residence2.
Who is Eligible
Only homeowners aged 62 and older can qualify for a HECM. There are substantial fees and insurance costs associated with HECMs at closing and during the life of the loan. However, HECMs are nonrecourse loans, meaning that neither the homeowner nor their estate will have to pay more at the end of the loan than what the home is worth, regardless of the home value at the time of sale1.
Benefits of a HECM loan
Cash Flow: By using a HECM, seniors can improve their cash flow situation by removing a significant expense (such as a traditional mortgage payment) from their budget.
- No Repayment During Ownership: With a HECM, you can access your home equity without making monthly payments. The loan is repaid only when specific conditions are met (e.g., selling the home, passing away, or moving to another residence).
- FHA Backing: The FHA guarantees HECMs, ensuring that you won’t be stuck with a large debt if your loan balance exceeds your home value when you move out1.
Types of Reverse Mortgages
- HECM: The most popular type of reverse mortgage, backed by the FHA. It allows homeowners aged 62 and older to tap into their home equity while retaining ownership. HECMs are nonrecourse loans, providing protection against owing more than the home’s value1.
- Other types of reverse mortgages include proprietary reverse mortgages and single-purpose reverse mortgages, but HECMs are the most widely used1.
In Summary
A HECM loan can be a valuable financial tool for older homeowners who want to access their home equity without selling their homes or making monthly mortgage payments3. If you’re considering a reverse mortgage, it’s essential to understand the terms, costs, and potential risks involved. Always consult with a financial advisor before making any decisions related to your home equity1.
Source(s)
1. Home Equity Conversion
Mortgage (HECM): Definition, Eligibility
2. Everything
You Need to Know About HECM Loans – U.S. News
3. What
Is A Home Equity Conversion Mortgage? – Forbes Advisor
4. HUD FHA
Reverse Mortgage for Seniors (HECM)