What is a Home Equity Conversion Mortgage (HECM)?
A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA). This program is designed for older homeowners (typically aged 62 and over) to convert a portion of their home equity into cash. The funds can be received in various forms such as monthly payments, a lump sum, or through a line of credit. Unlike a traditional mortgage, the borrower of a HECM does not make monthly repayments. Instead, the loan becomes due when the borrower sells the home, permanently moves out, or passes away.
Examples
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Monthly Payment Option: John, a 65-year-old retiree, opts for a HECM that provides him with monthly payments. This financial stability helps him cover his living expenses without the need to sell his home or take on other forms of debt.
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Lump Sum Payment: Mary, aged 70, chooses to receive a one-time lump sum payment after taking a HECM. She uses this amount to pay off existing debts and make significant home improvements.
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Line of Credit: Susan, a 68-year-old homeowner, selects the line of credit option in her HECM. This provides her with a financial reserve that she can draw upon as needed, ensuring she has access to funds for emergencies or large purchases.
Frequently Asked Questions
1. Who is eligible for a Home Equity Conversion Mortgage?
To qualify for a HECM, the homeowner must be at least 62 years old, the property must be their primary residence, and they must own the home outright or have a considerable amount of equity. Additionally, the borrower is required to undergo financial counseling.
2. How is the loan amount determined?
The amount that can be borrowed is based on the age of the youngest borrower, the current interest rate, the appraised value of the home, and FHA’s mortgage limits.
3. Is the income received from a HECM taxable?
No, the proceeds from a HECM are not considered taxable income. However, it’s advised to consult with a tax professional for personalized advice.
4. What are the costs associated with a HECM?
Borrowers must pay various fees such as an origination fee, servicing fees, and mortgage insurance premiums. These costs can often be financed into the loan.
5. What happens when the borrower dies or sells the home?
When the borrower dies or sells the home, the loan must be repaid. This typically involves selling the house to settle the loan. If selling the home does not cover the loan balance, FHA insurance makes up the difference.
Related Terms
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Reverse Mortgage: A financial product that allows homeowners to convert home equity into cash without having to sell their homes.
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Home Equity: The market value of a homeowner’s unencumbered interest in their real property — that is, the value of the real estate minus the outstanding balance of any mortgages.
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FHA Insurance: Insurance provided by the Federal Housing Administration to protect lenders against losses resulting from borrower default on FHA-insured loans.
Online Resources
- U.S. Department of Housing and Urban Development (HUD) on HECMs
- AARP Reverse Mortgage Overview
- National Reverse Mortgage Lenders Association (NRMLA)
References
- Federal Housing Administration. “Home Equity Conversion Mortgage (HECM) Program.” U.S. Department of Housing and Urban Development.
- AARP. “Understanding the Home Equity Conversion Mortgage (HECM).”
- National Reverse Mortgage Lenders Association (NRMLA).
Suggested Books for Further Studies
- “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement” by Wade Pfau
- “The Simple Handbook for A Smart Reverse Mortgage: Clear Answers to Your Most Frequently Asked Questions on Reverse Mortgage” by Daniel S Turner
- “The Reverse Mortgage Book: Everything You Need to Know Explained Simply” by Cindy Holcomb
