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You can receive a monthly cash payment from your home equity through a home equity conversion mortgage (HECM), a reverse mortgage that is federally insured and uses your house as collateral.
HECMs are backed by the U. S. Department of Housing and Urban Development (HUD). You can use the money you receive, which is typically tax-free, however you please. However, getting one can be challenging and isn’t always the best option. There are prerequisites, restrictions, and fees that can add up quickly.
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Note from the Editor: This article’s content is solely based on the author’s opinions and suggestions. It might not have received approval from any of our network partners through reviews, commissions, or other means.
You can receive a monthly cash payment from your home equity through a home equity conversion mortgage (HECM), a reverse mortgage that is federally insured and uses your house as collateral.
HECMs are backed by the U. S. Department of Housing and Urban Development (HUD). You can use the money you receive, which is typically tax-free, however you please. However, getting one can be challenging and isn’t always the best option. There are prerequisites, restrictions, and fees that can add up quickly.
How does a HECM work?
A HECM can supplement your income during retirement. A HECM could offer you a sizable loan amount to work with, whether you want to go on vacation to Bermuda or need to pay for medical care.
In a HECM, you apply for the loan, talk with a HUD-approved counselor and receive an offer.
The amount you qualify for is determined by your age, the age of your spouse (even if they aren’t on the loan), the current interest rates, the appraised value of your home, and the current FHA mortgage limits.
What is the difference between a HECM and a reverse mortgage?
A HECM is a type of reverse mortgage. The fact that it is protected by HUD insurance and is subject to Federal Housing Administration (FHA) rules distinguishes it.
Is a HECM a second mortgage?
A HECM is a second mortgage, as are all reverse mortgages. A second mortgage is a loan that comes after a first or “forward” mortgage in which the lender makes a claim against the equity in your home (which serves as collateral).
What is a HECM purchase?
A HECM purchase is when you make a new primary residence purchase using the proceeds from a HECM loan. A HECM purchase is when you make a new primary residence purchase using the proceeds from a HECM loan. Depending on the HECM, you may be able to pay back the loan in full, refinance the HECM loan, or choose a flexible repayment option.
Who is eligible for a HECM?
You and your home must adhere to HUD requirements in order to qualify for a HECM loan.
For borrowers to be qualified for a HECM, they must fulfill the following criteria:
In addition, your property must also meet the following requirements. It must be:
Who shouldn’t take out a reverse mortgage?
If you only want to borrow a small amount, are under the required age, or intend to stay in your home for a brief period of time, you shouldn’t get a reverse mortgage.
How do you apply for a HECM?
To pick the best HECM loan offer, consider:
What are the pros and cons of a HECM?
How can you repay a HECM?
When the property is no longer the borrower’s primary residence, the reverse mortgage is fully repaid. Usually, this occurs when a homeowner passes away, sells their house, or vacates. If you neglect to make the required tax and insurance payments, as well as neglect to perform the required home maintenance, you might also be required to repay a HECM.
You could sell your home, cash out assets, or refinance the reverse mortgage into a conventional loan or another reverse mortgage in order to pay back the HECM. You are legally protected no matter what you decide, and you won’t typically have to pay more to pay off the loan than the home’s appraised value. Here are more details on how to terminate a reverse mortgage.
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Even though it might be the best option for you, you shouldn’t decide without knowing how a reverse mortgage will affect your estate planning.
For a borrower’s heirs, a reverse mortgage frequently has tax ramifications. Learn how a reverse mortgage can affect your taxes.
FHA borrowers can save money with the streamline refinance program without having their credit or employment verified. Read on to find out how it works.
FAQ
What is the downside of an HECM loan?
Cons of HECM: You must reside in your property for a significant portion of the year in order to receive a HECM. If you decide to sell your house or move, you will be required to repay the HECM.
How does a HECM loan work?
If there is an existing mortgage, it is paid off first by the HECM loan before the remaining funds can be used for anything else and monthly mortgage payments are no longer necessary. However, homeowners must continue to maintain the home and pay their property taxes and homeowners insurance.
Is HECM for purchase a good idea?
Due to credit issues or insufficient income, homeowners who are unable to obtain home equity loans at lower interest rates may benefit from HECM reverse mortgages. Borrowers with bad credit don’t pay higher interest rates than those with good credit, which is one benefit of an HECM reverse mortgage.
What is the borrower of a HECM loan required to pay?
In order to reimburse the lender for processing your HECM loan, you will pay an origination fee. A lender may impose fees equal to the higher of $2,500 or 2% of the first $200,000 of the value of your home plus 1% of the amount over that amount. HECM origination fees are capped at $6,000.