What Is A Hecm Loan

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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.

The HECM is FHA’s reverse mortgage program that enables you to withdraw a portion of your home’s equity. The amount that will be available for withdrawal varies by borrower and depends on: Age of the youngest borrower or eligible non-borrowing spouse; Current interest rate; and.

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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:

  • Be 62 years of age or older
  • Have significant equity in your home
  • Use the home as your principal residence
  • Not be delinquent on any federal debt
  • Be able to cover property taxes, insurance, homeowner association fees and other potential charges, for the ongoing future
  • Attend a session with a HUD-approved HECM counselor
  • In addition, your property must also meet the following requirements. It must be:

  • A single-family home or a multifamily property occupied by the borrower
  • An FHA single-unit-approved individual condominium or a unit in a HUD-approved condominium development
  • A manufactured home that meets FHA requirements
  • 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?

  • Identify HUD-approved lenders. Use HUD’s lender list tool to find a lender. You only need to select your state and the HECM option as the “service-originator type.” You could also search by lender name and a more specific area, such as a radius around a city or county.
  • Research the lenders. Google the name of each of the lenders you find on the HUD list for your area. Look at what they offer, browse consumer reviews and check out any complaints filed against them on the Consumer Financial Protection Bureau database.
  • Contact a couple lenders. Many HECM lenders don’t allow you to apply directly on their website. Instead, you can fill out a form for them to contact you.
  • Apply with a lender or two. The lender will ensure that you meet the basic requirements to officially apply for a HECM and then guide you through the process. You could communicate with a mortgage planner over the phone, via email or in person.
  • Attend a counseling session. As part of your application, you must attend a pre-purchase counseling session with a HUD-approved counselor — they can clarify your financial plan, give advice and connect you to additional resources.
  • Review and select an offer. Review any offer(s) you receive, choose the best HECM and sign on the dotted line.
  • To pick the best HECM loan offer, consider:

  • The costs. Look at both upfront costs and charges over the life of the loan. Costs will include an origination fee, servicing fees, a mortgage insurance premium and third-party charges, such as title search and inspection fees.
  • How you’ll receive the money. Do you want a lump sum, monthly payment or line of credit? Some lenders allow you to pay a fee to later change how you receive funds.
  • How you can repay the loan. You can repay the loan in full, in a lump sum by pulling assets to pay the amount in cash or by refinancing the HECM loan.
  • What are the pros and cons of a HECM?

  • You can have a steady stream of income for years without moving out of your home
  • The income from a reverse mortgage is tax-free
  • HECM income won’t alter your Social Security or Medicare benefits
  • You can pull large loan advances
  • A HECM’s total loan costs are typically lower than proprietary loan costs
  • You or your heirs could lose the home if the loan isn’t repaid
  • Upfront costs can be high
  • Servicing fees and mortgage insurance premiums are charged over the life of the loan
  • Your interest fees grow as you borrow more
  • The interest isn’t tax-deductible until you pay off the loan
  • Most HECMs have variable rates — your interest rate can go up
  • 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.