What are Home Equity Conversion Mortgages?
An HECM or Home Equity Conversion Mortgage is a kind of reverse home loan that the FHA or Federal Housing Admin insures. This debenture allows seniors to convert their houses into cold cash. The amount that people can borrow is based on the home value appraised by the financial institution. The value is subject to Federal Housing Administration limits.
People also need to be at least sixty-two years old to avail of this debenture. Money is advanced against the equity value of the house. The interest rate accumulates on the outstanding debenture balance, but no payments need to be made until the property is sold, the individual dies, or they moves out of the house, at which point the debenture needs to be repaid in full.
To know more about HECM, click here for more info.
How does this type of loan work?
HECMs are a very common kind of reverse home loan. As a matter of fact, they make up most of the reverse housing loan market. Generally, the terms of these debentures can differ with privately sponsored reverse home debenture products – officially known as PRM or proprietary RM – potentially allowing for a higher borrowing amount with lower cost compared to a HECM.
But HECM will usually offer lower IRs for property owners. The economics of this type of loan – versus privately sponsored reverse housing debentures – will depend on the individual’s age, as well as how long they expect to own or live in the house.
A lot of these debentures will exclusively target senior citizens with no requirements for payment until they sell their houses or dies. HECMs can also be considered compared to HELs or Home Equity Loans. HELs are not dissimilar to RMs since individuals are issued cash advances based on their property’s equity value, which acts as a safety net or collateral.
But with HELs, the funds need to be paid back in steady monthly payments with interest after the money is disbursed. While HECM debentures don’t require individuals to make monthly amortizations, certain charges are associated with the servicing and closing of the mortgage. Individuals also need to pay the insurance premium. Although these insurance premiums and charges can be rolled into the mortgage, this lowers the amount of equity the individual can use, referred to as net principal limits.
Check out https://www.investopedia.com/terms/h/homeequityloan.asp for more details about HELs.
People eligible for this type of mortgage
The FHA sponsors HECMs and provides insurance on these products. The Federal Housing Admin also sets the eligibility and guidelines for these mortgages. Individuals can only get HECMs from traditional banks where the Federal Housing Admin sponsors these products. To get this kind of mortgage, people need to complete the standard application. To get approved, they need to meet all the necessary requirements set by the Federal Housing Administration. They must:
- Own the house or at least pay the down payment
- Be at least sixty-two years old
- Use the house as their main residence
- Not be delinquent on their federal debts
- Have the right financial capability to continue paying the monthly amortization in a timely manner, as well as other ongoing charges like property taxes, homeowner association fees, or insurance
- Participate in consumer info sessions provided by HUD-approved HECM counselors
In addition, the house needs to be one of the following:
- A manufactured house that meets Federal Housing Admin requirements
- An FHA- or HUD-approved condominium
- A single-family property or two- to four-unit house with one unit occupied by the individual applying for a mortgage
The difference between a reverse housing loan and a HECM
All HECMs are considered to be reverse mortgages (RM), but not all RM are HECMs. HECMs are considered RMs backed by the Federal Housing Admin and issued by FHA-approved financial institutions or lending firms.
Can borrowers lose their property with HECMs?
Yes, people can lose their properties to reverse mortgage lenders in several ways with this kind of loan. If they fail to keep it in good condition or pay insurance or property tax, the balance becomes due. Even if they leave their properties involuntarily because of a lengthy stay at nursing homes, assisted living facilities, or hospitals, they could lose their homes if they cannot afford to pay the balance on their RMs.
Are these things expensive?
The answer is a resounding yes; HECMs have pretty high mortgage insurance premiums, maintenance fees, and origination fees.
The bottom line
Home Equity Conversion Mortgages are the most common kind of RM. It allows older individuals to tap their home equity without having to pay their loans back until they move or pass. If they do not need to borrow above the limit for PRM and do not qualify for single-purpose reverse home loans through local nonprofits or government agencies, then this thing is the best choice for them.
