Is an HECM a Reverse Mortgage, and is it Right for You?

A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that allows homeowners aged 62 and older to access a portion of their home’s equity as a loan. Unlike traditional mortgages, where borrowers make monthly payments to the lender, a HECM reverse mortgage provides the homeowner with cash payments from the lender, based on the equity they’ve built up in their home.

With a HECM, the loan balance grows over time as the lender makes payments to the borrower, and interest accrues on the outstanding balance. The loan, including interest and fees, is typically repaid when the borrower passes away, sells the home, or moves out permanently. At that point, the home is sold, and the proceeds are used to settle the loan balance.

How Does a HECM Reverse Mortgage Work?

A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA). It allows homeowners aged 62 and older to access a portion of their home’s equity as a lump sum, line of credit, or monthly payments without having to make monthly mortgage payments.

To qualify for a HECM, the borrower must own their home outright or have a low remaining mortgage balance. The borrower’s age, home value, and interest rates determine the amount they can borrow. Older borrowers with higher-valued homes can typically access more equity.

The loan amount plus interest accrues over time, and the balance becomes due when the last surviving borrower passes away, sells the home, or moves out for 12 consecutive months. At that point, the borrower or their heirs must repay the loan balance, typically by selling the home.

Interest on a HECM accrues over the life of the loan, and the outstanding balance can grow quickly. However, borrowers are not required to make monthly payments, and the loan is non-recourse, meaning the lender cannot pursue other assets beyond the home’s value to settle the debt.

Borrowers must continue to pay property taxes, and homeowner’s insurance, and maintain the home. Failure to do so can result in the loan becoming due and payable.

Pros of a HECM Reverse Mortgage

1. Access Home Equity Without Monthly Payments: One of the primary advantages of a HECM reverse mortgage is that it allows homeowners aged 62 and older to access a portion of their home’s equity without having to make monthly mortgage payments. This can provide a much-needed financial cushion for retirees or those with limited income sources.
2. Ability to Stay in Home: With a HECM reverse mortgage, borrowers can continue living in their homes as long as they meet the loan obligations, such as paying property taxes, homeowners insurance, and maintaining the property. This can be particularly appealing for seniors who wish to age in place and avoid the stress and costs associated with moving.
3. Tax-Free Funds: The money received from a HECM reverse mortgage is not considered taxable income, which can be a significant advantage for those on a fixed income or trying to manage their tax liabilities in retirement.
4. Line of Credit Option: Some HECM reverse mortgages offer a line of credit option, which allows borrowers to access their home’s equity as needed rather than receiving a lump sum. This can be beneficial for those who want to access funds gradually or have a contingency plan for future expenses. Additionally, the unused portion of the line of credit grows over time, providing a potential source of additional funds.

Cons of a HECM Reverse Mortgage

Despite the potential benefits, HECM reverse mortgages also come with several drawbacks that borrowers should consider carefully.

1. Upfront Costs: HECM loans typically involve significant upfront costs, including mortgage insurance premiums, origination fees, and closing costs. These fees can add up quickly and reduce the amount of funds available to the borrower.
2. Interest Accrual Reduces Equity: With a HECM reverse mortgage, interest accrues on the loan balance over time, which means that the amount owed grows larger as the years pass. This gradual increase in the loan balance can significantly reduce the equity you have in your home, potentially leaving little or no equity for your heirs.
3. Repayment When Moving or Selling: HECM loans must be repaid in full when the borrower moves out of the home or passes away. If the loan balance exceeds the value of the home, the borrower or their heirs may need to cover the difference, potentially putting a financial strain on them.
4. Impact on Medicaid Eligibility: The proceeds from a HECM reverse mortgage can affect your eligibility for Medicaid and other need-based government assistance programs. It’s crucial to understand how the loan proceeds may impact your eligibility for these programs and plan accordingly.

Misconceptions About Reverse Mortgages

One of the biggest misconceptions about reverse mortgages, including HECMs, is that the lender takes ownership of your home. This is simply not true. With a HECM, you retain full ownership and title to your home. The loan is secured by the equity in your home, but you remain the homeowner.

Another common myth is that you can be forced out of your home if the loan balance grows larger than the home’s value. This is false. As long as you continue to meet the loan obligations, such as paying property taxes and homeowners insurance, you can never be forced to leave your home due to the loan balance exceeding the home’s value.

There is also a misconception that a reverse mortgage will affect your eligibility for Medicaid or other government benefits. In reality, the loan proceeds from an HECM are considered loan advances, not income. This means that they are not counted as an asset or income for determining eligibility for most government assistance programs, including Medicaid, Supplemental Security Income (SSI), and Social Security.

It’s important to separate fact from fiction when it comes to reverse mortgages. By understanding the realities and dispelling common myths, you can make an informed decision about whether an HECM is the right choice for your financial situation.

Is a HECM Right for You?

Determining whether a HECM reverse mortgage is right for you depends on your circumstances and financial goals. Here are some key factors to consider:

1. Age and Longevity: HECMs are designed for homeowners aged 62 and older. If you plan to remain in your home for several more years, a HECM could provide a valuable source of funds. However, if you anticipate moving soon or have a shorter life expectancy, the upfront costs may outweigh the benefits.
2. Home Equity: A HECM allows you to access a portion of your home’s equity without having to make monthly mortgage payments. If you have significant equity built up in your home, a HECM could unlock those funds for your use. However, if you have little equity, the loan proceeds may be limited.
3. Financial Needs: Consider why you need the funds from a HECM. If you need a steady stream of income to cover living expenses, a HECM could provide that. If you need a lump sum for a specific purpose, such as home repairs or medical bills, a HECM could be a viable option. However, if you have other sources of income or assets, those may be better alternatives.
4. Inheritance Plans: A HECM will reduce the equity in your home, which could impact the inheritance you leave behind. If preserving your home’s equity for your heirs is a priority, a HECM may not be the best choice.
5. Cost Considerations: While an HECM doesn’t require monthly mortgage payments, there are upfront costs and ongoing fees to consider. Evaluate whether the loan proceeds will outweigh these costs over the long term.

Ultimately, the decision to pursue a HECM should be based on a careful analysis of your situation, financial needs, and long-term goals. It’s essential to weigh the pros and cons and seek professional advice from a housing counselor or financial advisor to determine if an HECM is the right choice for you.