HECM Loans For Seniors: Everything You Need to Know

For 50 years, reverse mortgages have helped seniors reach their financial goals in retirement. In 1961, the very first reverse mortgage helped Nellie Young keep her home after the passing of her husband. Since its creation, the reverse mortgage has gone through several transformations, with its uses expanding to help seniors supplement their retirement income, consolidate their debts, pay for emergencies or even purchase a new home.

While there are a few different types of reverse mortgages, the most common one is the Home Equity Conversion Mortgage (HECM), which provides various protections for homeowners and offers the most flexible way to receive and use their funds. However, while the HECM has helped many homeowners and has guidelines to protect borrowers, this financial option isn’t always the best one.

The HECM is a government-insured reverse mortgage loan that allows homeowners who are 62 and older to convert their home equity into cash. The loan first pays off the existing mortgage, if there is one, then the rest of the money can be used for anything.

Once the existing mortgage is paid off by the reverse mortgage, there are no monthly mortgage payments required on the new loan. However, homeowners are still responsible for paying their property taxes and homeowners insurance and must continue to maintain the home. If the borrower decides not to make a monthly loan payment, interest for that month is added to the loan balance.

A HECM comes due when the last borrower moves out of the home, sells the home or passes away. The loans may also come due if the borrower doesn’t pay their property taxes or homeowners insurance or fails to maintain the property.

When the loan comes due, the home is sold to pay off the loan. If the borrower has passed away, heirs can sell the home or purchase the home for the amount due or 95% of the appraised value – whichever is less. They can also choose to sign the deed over to the lender and walk away from the home.

To get a HECM, you’ll want to go to a lender that offers this type of reverse mortgage. At this time, Rocket Mortgage^® does not offer HECMs.

Like other loans, you apply for it. When it comes to the HECM process, there are a few steps you’ll take that are unique to this type of loan.

Required HECM Counseling

Because of the complex nature of the reverse mortgage, the Department of Housing and Urban Development (HUD) requires all borrowers to complete a reverse mortgage counseling session. The HUD-approved, third-party counseling session ensures you understand how the loan works, the costs associated with it and any other finance options you may have. Counseling may cost up to $200, lasts up to 90 minutes and may be done in person or, in some states, over the phone. 

Approval Amount

There are three factors that determine how much you can borrow with a HECM:

• The age of the youngest borrower
• Current interest rates
• The amount of equity you have in your home

Financial Assessment

To ensure borrowers are in a good financial position to take on the financial obligations of the loan (paying property taxes, homeowners insurance and home maintenance costs), HUD also requires the borrower to undergo a financial assessment during the process. During the financial assessment, the lender will review a borrower’s income, debts and credit history, though credit score is not a determining factor in getting a reverse mortgage. Depending on what the financial assessment reveals, the lender may decide to set some of the reverse mortgage proceeds aside to help pay for property taxes and insurance.

Payment Options

There are two types of HECMs: a fixed–rate HECM and an adjustable–rate HECM. The fixed–rate option has an interest rate that stays the same throughout the life of the loan and offers only one way to receive payment – in a lump sum. The adjustable–rate option has an interest rate that may fluctuate throughout the life of the loan and offers multiple payment options – a lump sum, monthly payments, a line of credit or any combination of the three.

Lump Sum

If you choose this payment option, all of your reverse mortgage proceeds will be delivered in one lump sum payment. This option is available with a fixed-rate or adjustable-rate HECM loan.

Monthly Payments

With this payment option, you’ll receive your proceeds in monthly payments. You can receive the monthly payments for a set amount of time, known as term payments, or you can choose to receive monthly payments throughout the life of your loan, known as tenure payments. This option is only available for the adjustable-rate HECM.

Credit Line

A reverse mortgage line of credit is a payment option that puts your proceeds into a line of credit that you can access whenever you need, similar to a home equity line of credit (HELOC). If you don’t use the money right away, the available funds in your line of credit can continue to grow in value over time, providing more money in the future.

As long as you have the loan, the line of credit cannot be suspended or called due. The line of credit payment option is only available with an adjustable-rate HECM.

Any Combination

For an even more customized payment option, you can also combine different payment options. For example, you can have your proceeds put into a line of credit and receive them as monthly payments at the same time.

There are three kinds of reverse mortgages: a HECM, a single-purpose reverse mortgage and a proprietary reverse mortgage. Of the three, the HECM is the only government-insured reverse mortgage.

Backed by HUD and insured by the Federal Housing Administration (FHA), the HECM is the least risky reverse mortgage because there are a number of things the government has put in place to protect borrowers. That includes the required HECM counseling and financial assessment, which ensure the borrower understands their financial situation and all financial options before getting the loan. And, because the loan is insured by the FHA, borrowers are also better protected from declining home values. The HECM is what’s known as a nonrecourse loan, which means that a borrower will never owe more than their home is worth. If their home sells for less than what is owed on the loan, FHA insurance covers the difference – not the borrower or their heirs.

A home equity loan also issues cash based on equity but requires monthly payments shortly after the funds are received. With a reverse mortgage, monthly payments on the loan are optional. As long as borrowers continue to pay their property taxes and insurance and maintain the home, payment of the HECM only comes due when the borrower moves out of the home sells the home or passes away.

Another difference between the HECM and home equity loan is that the HECM offers more ways to receive your proceeds. While a home equity loan only disburses your funds in one lump sum payment, a HECM offers a lump sum payment, monthly payments or a line of credit.

Eligibility requirements are different, too.

To obtain a HECM, you’ll also have to meet the following criteria:

• You must be 62 years of age or older.
• The property must be your primary residence.
• You must have enough equity in your home.
• You can own your home free and clear or have an existing mortgage.
  

If you’re interested in getting a HECM, you’ll need to use an FHA-approved lender that offers this type of reverse mortgage. While Rocket Mortgage^® is an FHA-approved lender, we do not currently offer HECMs.

It’s important to remember that reverse mortgages are complex loans and careful consideration is required before applying. Understanding the HECM’s benefits, as well as its drawbacks, will help.

HECM Pros

In the right situation, a reverse mortgage can be a great addition to your retirement plan for several reasons. Here’s how you can benefit.

• You can use your reverse mortgage proceeds for anything you want, including consolidating your debts, supplementing your income or making home improvements.
• You can eliminate your monthly mortgage payments. Just remember to continue to pay your property taxes and homeowners insurance.
• You remain the owner of the home. Your name stays on the title.
• Credit score is not a factor when considering eligibility for a HECM.

HECM Cons

While reverse mortgages can be a helpful financial tool in retirement, they aren’t the best option for everyone. Here’s why:

• HECM loans typically have higher fees than traditional mortgages.
• Life is unpredictable. If a medical emergency or other incident keeps you out of the home for the majority of the year, your loan could come due.
• While your heirs do have options, the burden of dealing with the loan falls on them if you pass away.
• If you choose a payment plan that doesn’t last the life of the loan, you could outlive your proceeds.

A HECM is a loan that allows seniors to use the equity in their home while paying off their existing mortgage. Insured by the government, a HECM can be used to supplement your retirement income, but the mortgage can be complex and isn’t always the right option for everyone.

If you’re considering a HECM or other type of reverse mortgage, it’s important to look into alternative options as well, including a home equity loan. To discuss other home financing options, contact a Home Loan Expert.