Many seniors want to access the equity they’ve paid into their homes. If you’re one of them, a home equity conversion mortgage (HECM) might be a viable option for you. A home equity conversion mortgage is a type of reverse mortgage loan backed by the federal government and offers many benefits for those in the right situation.
In general, a HECM loan offers financial flexibility such as retirement supplementation for income and the elimination of a monthly mortgage payment to those who qualify.
In this blog, we’ll examine the top HECM benefits and discuss other options that allow seniors to access their home equity, such as a home equity loan alternative.
#1 Security of Government Backing
One of the first benefits of a HECM reverse mortgage is the security it offers borrowers in contrast with other reverse mortgages. The HECM is the only reverse mortgage loan insured by the federal government and thus can only be acquired through an FHA-approved lender.
This backing comes with a detailed vetting process to certify that you’re eligible for the program. To qualify, you must:
- Be at least 62 years old
- Live in the home in question
- Not have defaulted on any federal debt
- Owe very little, or nothing, on the home
- Complete an information session with an approved HECM counselor
If you meet these requirements and your application is approved, one of the benefits of your HECM loan is that it will pay off any remaining mortgage owed on your home. The remainder of the money from the loan can be used for anything you’d like.
#2 Eliminate Monthly Mortgage Payments
Another of the HECM benefits is that it eliminates your monthly mortgage payment, replacing it with a new loan. You’ll pay the closing costs, loan origination, and third-party inspection or appraisal fees, although these can be financed as a part of your loan.
With a reverse mortgage, you don’t have to make any monthly payment on the loan itself—it will be paid off either when you choose to sell the home or when you pass away.
It’s important that you, as the borrower, must also keep the property in good condition throughout the life of the loan. Keep in mind that you’ll also be responsible for paying your property tax and the premium on your homeowner’s insurance. Many states require high property tax so it’s important to inform yourself on your states’ property tax rates. Learn more about Florida property tax rates, property taxes in South Carolina or whichever state you live in.
#3 Supplemental Income
One of the biggest HECM benefits is that it offers seniors is the supplemental retirement income you’ll draw from the new loan. Once you’ve been approved and your loan has been processed, you can use the funds for whatever you choose, including:
- Home improvements or repairs
- Paying off other debt
- Living expenses
Many people haven’t saved quite enough for retirement, and access to your home equity can help bridge that gap.
#4 Payment Options for Homeowners
Another of the HECM benefits is it also allows you to select how you receive your funds. The five options for borrowers to choose from are:
- As equal monthly payments as long as you’re alive or residing in the home
- In monthly installments for a predetermined period of your choosing
- From a line of credit accessed as needed
- In a combination of a credit line and monthly payment
This gives you the freedom to select how to receive the money from your loan.
#5 No Minimum Credit Score
HECM benefits also include no minimum credit score requirement. Instead, your financial eligibility is based on your:
- Living expenses
- Overall credit history
This means that you might be able to get a HECM loan even if you don’t qualify for other methods of home equity access. For example, this is a key distinction when comparing a HECM vs HELOC.
#6 Title Remains In Your Name
Finally, one of the last benefits of when you opt for a HECM loan, is that the title of your home remains in your name. You still own it and can choose to sell it at any time. The following home types are eligible for a HECM mortgage:
- A single-family home that’s your primary residence
- A 2–4 unit home, as long as you own and occupy one of the units
- A HUD-approved condominium unit
- Manufactured homes approved by the FHA
If you decide that it’s time to sell your home, you can use the HECM loan proceeds to purchase a new home. You’ll need to be able to pay any difference between the available HECM funds and the sales price of the new property. You’ll also be responsible for paying the closing costs and other related fees for the property you’re purchasing.
Sale-Leaseback Solutions—Providing Benefits & Solutions for Seniors
While there are many benefits to a HECM, it’s not the right choice for everyone. You may not meet the eligibility requirements or you might want to profit from a sale and pass on an inheritance. This is where you can consider a sale-leaseback program. It isn’t a reverse mortgage program, and there aren’t age restrictions.
Instead, you can convert your equity in your home to cash and stay in your home. How do you do that? You sell your home, convert the equity to cash, and lease it back.
We will examine the top HECM benefits and discuss other options that allow seniors to access their home equity, such as a home loan alternative
- HUD. Home Equity Conversion Mortgages for Seniors. https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
- HUD. How the HECM Program Works. https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou
- Benefits.gov. What is Home Equity Mortgage Conversion? https://www.benefits.gov/benefit/709