A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan which enables seniors to access a portion of their home’s equity to obtain tax free1 funds without having to make monthly mortgage payments2. With a HECM loan, borrowers still own their home. Reverse mortgage loans can be beneficial for senior homeowners who need extra funds to supplement their retirement income.
There’s also another HECM option, the Home Equity Conversion Mortgage for Purchase or HECM (said “heck-um”) for Purchase. HECM for Purchase loans were introduced by the FHA in 2009 and allow homeowners 62 and older to purchase a new home using a reverse mortgage loan.
To qualify for a reverse mortgage loan, the borrower must be at least 62 years old and have significant equity in their home. With a HECM for Purchase, the borrower must have enough funds to make the initial investment (down payment). The down payment may be up to 35-50% or more of the purchase price depending on various factors. With all HECM loans, the homeowner is required to maintain the home and pay property taxes and insurance. The loan becomes due when the homeowner either passes away or no longer lives in the home full time.
The amount of money the borrower can receive with both a traditional reverse mortgage and a HECM for Purchase is based on a few factors: the age of the youngest borrower or non-borrowing spouse, current interest rates and the lesser of the appraised value of your home, sale price or the maximum lending limit. Generally, the older the borrower is, the more money they will be eligible to receive. It is important to remember that reverse mortgage loans are not for everyone and not everyone will qualify. We’ve highlighted some of the pros and cons to each reverse mortgage option below:
HECM for Purchase Pros
-Homeowners can buy a home that better fits their needs (single story, handicap accessible, etc.)
-Homeowners can move to a neighborhood closer to family, friends, medical facilities, etc.
-Homeowners can purchase a new home while preserving their cash.
-Borrowers do not pay any monthly mortgage payments for the life of the loan.2
HECM for Purchase Cons
-The loan balance grows over time.
-There may not be any equity left in the home when the loan becomes due.
-The borrower or their heirs will receive what is left of the equity in the home after the loan is repaid. Often, there is minimal or no equity left in the home.
Traditional Reverse Mortgage Loan Pros
-Homeowners stay in the home and neighborhood they love and are comfortable with.
-Homeowners can use the reverse mortgage loan funds in any way they like, include making repairs and updates to the home.
-Borrowers do not pay any monthly mortgage payments for the life of the loan.2
Traditional Reverse Mortgage Loan Cons
-The loan balance grows over time.
-The loan becomes due when the borrower passes away or no longer lives in the home full time.
-The borrower or their heirs will receive what is left of the equity in the home after the loan is repaid. Often, there is minimal or no equity left in the home.
Anyone age 62 or older who is thinking purchasing a new home may want to consider a HECM for Purchase to see how much they may qualify for. For those who are planning to stay in their current home, but would like an extra source of cash, a traditional reverse mortgage could be the best option. For more information about current rates or to see if you qualify for a HECM reverse mortgage loan, call 866-751-6105.