WHAT IS AN HECM?
The HECM is an age-based mortgage for people age 62 and older, and is insured by the FHA. The HECM differs from a traditional mortgage due to the fact that monthly payments are put off, and the loan balance increases as time goes on. Because HECM is back by the FHA, neither borrowers nor their heirs are held personally liable for the debt.
WHAT ARE THE BENEFITS?
So now you must be wondering what all of this means. Allow us to explain…let’s assume that you use an HECM plan to purchase the home of your dreams, and then decide to move in 10 years. Once you sell your home, you will receive 100% of the net proceeds after paying off the loan balance at the time of the sale. This is basically how a traditional mortgage works.
The direct and primary benefit of using an HECM takes effect while you are alive. This is because you are not paying a monthly payment to the mortgage company, which in turn increases you monthly cash flow.
The second benefit is related to your estate. If at the time of your passing your loan balance is greater than the value of your home what would happen? In a traditional mortgage plan, your estate would be forced to sell the home at a lower price. This means that the home would be sold at a loss and they would have to cover the difference. However, in an HECM, the fact that it is insured by the FHA means that neither you nor your heirs are personally accountable for the difference if your home is sold for a loss. More simply, if the home is sold at a lesser value, it isn’t your problem!
While the HECM is relatively new (January, 2009), the idea of reverse mortgages has been around since the 1980’s, and has proved to be a very favorable financial planning tool. The basis and purpose of a reverse mortgage was to allow homeowners to directly turn their home equity into cash without ever having to make a monthly mortgage payment. While this aspect remains the same in an HECM, the difference between an HECM and a traditional reverse mortgage is the “front end” of the process.
Prior to the HECM, people were paying for a traditional mortgage in order to obtain their dream home, and then tapping into their equity using a traditional reverse mortgage. While they were able to turn their equity into cash directly, the unappealing factor was the incurred closing costs for TWO separate transactions. The HECM has the ability to give homeowners what they want all in a single transaction.
HOW DO I QUALIFY?
- You must be 62 years of age or older.
- The HECM can only be applied to your primary residence.
- Money brought to closing mus come from asset accounts or a gift and cannot be acquired through debt.
It’s as simple as that!
Contact Us for more information on Reverse Mortgages.
DISCLAIMER (per HUD Mortgagee Letter 2014-10):
"This material is not from HUD or FHA and has not been approved by HUD or a government agency"