The Home Equity Conversion Mortgage (HECM) is an FHA insured reverse mortgage and is the safest and most popular type of reverse mortgage on the market. HECM’s are the only reverse mortgage insured by the federal government through the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD).
The HECM allows home-owners, ages 62 and better, to convert part of their home equity into tax-free proceeds.* There is never a required monthly mortgage payment on a HECM, and there is no pre-payment penalty if the consumer ever chooses to pay the loan back in part or in full. Repayment of the loan can never exceed the home’s value and the heir’s will never inherit a debt, unless they choose to retain the home as their own property. The borrower retains the home as long as loan terms are satisfied. These terms include maintaining the property and paying property taxes, homeowner’s insurance and any HOA fees. The home must be the borrower’s primary residence.
*Consult a tax specialistContinue reading Show less
Reverse Mortgage Proceeds
The loan amount of the HECM is based on the age of the youngest borrower or eligible non-borrowing spouse living in the home, the home value, and current interest rates. Borrowers must attend HUD-certified counseling prior to applying for a HECM loan. There are several ways to receive the funds from the HECM including:
- A single lump sum disbursement
- Equal monthly disbursements for as long as the consumer remains in the home
- Equal monthly disbursements for a set amount of time according to the consumer’s choosing
- A line of credit, in which funds are available to be drawn upon whenever the consumer chooses
- A combination of monthly disbursements and a line of credit
*Fixed rate mortgages are limited to the single lump sum disbursement option. The disbursement of mortgage proceeds during the first twelve-month period is subject to an initial disbursement limit.Continue reading Show less
Home Equity Conversion Mortgages are insured by FHA, made possible by the payment of MIP (mortgage insurance premium) through the loan, this provides a non-recourse feature for the consumer.
Aspects of the non-recourse feature are as follows
- The consumer will not owe more than the home is worth at the time the loan is paid back, either by death or sale of the property or failure to pay taxes
- The home is the only asset that can be used to pay the loan balance.
- This prevents the lender from using any other accounts belonging to the consumer or to the heirs (estate) to recoup the loan balance. (e.g. Even if the home was in a living trust that still has millions in available other assets in the trust, the home value is still the maximum amount that can be used to recoup the balance. Thereby leaving the other assets untouched.)
The non-recourse feature also provides benefits to the heirs of the property
If an heir inherits the property, the heir may choose to either:
- Sell the home and the proceeds of the sale will pay back the loan with any remaining equity being given to the heir
- Refinance the home into their name and pay off the existing HECM balance
- If heirs wish to retain the property they can pay the lesser of the reverse mortgage balance or 95% of the home’s appraised value
- Potential deferred interest deductions available to the heirs at time of sale.