You’ve been making a monthly mortgage payment for quite a while now, and now you want to access the money that you’ve paid into your home. However, you still owe money on your home loan. So, how do you utilize your equity?
If you’re over the age of 62, one option is a Home Equity Conversion Mortgage (HECM). Also known as a reverse mortgage loan, a HECM allows you to access the equity you’ve paid into your home.
But a HECM isn’t right for everyone. In this blog, we’ll describe how a HECM works, the FHA requirements, HECM benefits, and some alternatives for those seeking another option.
What is HECM Loan?
A HECM reverse mortgage is different from other types of reverse mortgage like the proprietary reverse mortgage because it’s backed by the federal government. The backing of the government makes a HECM less risky for borrowers than other reverse mortgages. However, there are strict FHA requirements borrowers need to meet to qualify (which we discuss below).
Seniors often opt for a HECM reverse mortgage loan to supplement their retirement income or to access the equity they have in their homes. The HECM proceeds can also be used to purchase a new home.
How Does a HECM Loan Work?
If you’re thinking of exploring a HECM, you’ll need to understand how the process works. The loan you receive first pays off your existing mortgage loan balance. The remainder of the money can be used for anything you choose.
The biggest benefit of this type of loan is that you aren’t required to make payments on the new loan. However, you’re responsible for paying the property taxes and homeowners insurance premiums on your home. The loan itself doesn’t get paid off until the reverse mortgage borrower passes away or decides to sell the home. The proceeds from the home sale are then used to pay off the HECM.
The other costs involved with a HECM include:
- Closing costs incurred from third parties such as title companies, inspectors, and appraisers
- Loan origination and servicing fees
- FHA mortgage insurance costs
If necessary, these can be financed into the loan and will be deducted from the final HECM proceeds you receive from the reverse mortgage lender.
You can receive payment from your HECM program through five different methods, including:
- Line of Credit – You can use the money whenever you choose and in any amount until you have used up the money in the line of credit.
- Tenure – Tenure payments are monthly installments paid in equal amounts for as long as you occupy the home or at least one HECM borrower is living.
- Modified tenure – This option combines a line of credit with tenure payments so that you receive the monthly payment and receive a line of credit.
- Term – Term payments are established as equal amounts for a set number of months.
- Modified term – Like modified tenure, modified term payments are combined with a line of credit. The HECM borrower chooses the number of months they’ll receive the term payments from the FHA approved lender.
These options are available for the qualified reverse mortgage borrower.
What Are the HECM Requirements?
If you think a HECM program might be right for you, there are several specific requirements you must meet to qualify. The federal government mandates that you:
- Are at least 62 years old
- Live in the home as your primary place of residence
- Are not delinquent on any federal debt
- Owe very little on your mortgage or own the property outright
- Agree to participate in an information session
Along with these requirements, your property must be eligible. The approved property types include:
- Single-family homes
- Multi-unit homes (up to four units) where the applicant occupies one unit
- HUD-approved condominiums
- FHA-approved manufactured homes
If you don’t meet these criteria, there are other options you may qualify for. Let’s take a quick look at some of the other options.
HECM vs. Alternative Means of Equity Conversion
There are other equity conversion options for those who either aren’t eligible for a HECM or who want something different. Some options include:
- Other reverse mortgages
- Home equity lines of credit (HELOC)
- Cash-out refinances
- Home equity loans
- Sale-leasebacks (a great home equity loan alternative)
HECM vs. HELOC or HECM vs. cash-out-refinance— which should you choose? The best choice for you depends on your financial situation and your needs. It’s essential to take the time to explore all of your options so that you make the right decision. Whichever you choose will have long-lasting financial implications for you and your family.
Home Equity Solutions with EasyKnock
A HECM can be a useful solution for some people. It allows you to access the cash hidden in your home equity. However, certain stipulations must be met to qualify. Likewise, this solution may not be right if a loved one plans to continue living in your home after your passing (and they can’t be listed as a co-applicant).
If you’re seeking an alternative method of converting your home equity to cash to use as a downpayment on your next home, EasyKnock may have a solution for you. Our sale-leaseback option buys your home so you can convert your home equity to cash. You can then rent it back for as long as you’d like.
Contact EasyKnock today to see if you qualify and to learn how you can utilize your home’s equity.
Describing how a HECM works, the FHA requirements, HECM benefits, and some alternatives for those seeking another option. If you are still unsure of alternative options to securing this specific loan after reading this article, consult a financial advisor to discuss your options.
- Benefits.gov. Home Equity Conversion Mortgages (HECM). https://www.benefits.gov/benefit/709
- HUD. Home Equity Conversion Mortgages for Seniors. www.hud.gov/program_offices/housing/sfh/hecm/hecmhome