The Home Equity Conversion Mortgage (HECM) Zero is a smart and affordable reverse mortgage loan. A HECM loan allows homeowners aged 62-plus years to access a portion of their home’s equity. If you’re looking for a flexible way to access your home equity through a line of credit, the HECM Zero may be a beneficial alternative to obtaining a Home Equity Line of Credit (HELOC).
Benefits of the HECM Zero
- Competitive rates vs a HELOC
- Zero closing costs excluding the Department of Housing and Urban Development (HUD) counseling fee
- No prepayment penalties
- No draw fees or utilization fees
- Interest rate cap is typically lower than a HELOC
- Optional monthly mortgage payments for the life of the loan1
- No set draw period or limits on the number of draws after the first 12-month disbursement period
- Use the line of credit at any time and in any amount, until your line of credit is exhausted
- You choose how to use your funds
- Generally easier to qualify for than a HELOC
- Federal Housing Administration (FHA) insured – guarantees you’ll continue to receive loan proceeds1
- Mortgage insurance – protects you and your heirs from owing more than the home is worth when sold
- Guaranteed growth – unused portion of the line of credit grows regardless of home value2
- Line of credit cannot be reduced or cancelled by your lender, as long as loan obligations are met
- HUD counseling provided by impartial third party helps you understand loan details
- The youngest borrower must be aged 62-plus years
- Property must be a single family residence, two-to-four unit owner-occupied home, townhouse, approved condominium or manufactured home
- You must have sufficient equity – typically 50% or higher
- You must meet financial eligibility criteria as established by HUD
- Initial disbursement amount at closing and during the first 12-month disbursement period must be 60% or less of the principal limit in most cases3
- You may need to set aside additional funds from the loan proceeds to pay for taxes and insurance
To be eligible for the HECM Zero loan:
- In addition to eligibility, the following conditions must be met:
- Ability to pay off your existing mortgage using the loan proceeds
- Complete a HUD approved 3rd party counseling session
- Maintain your home according to FHA requirements
- Continue to pay your property taxes and homeowners insurance
- Live in the home as your primary residence
- Tax, flood and hazard insurance costs are not covered by the HECM Zero product and would need to be paid before or at closing by the borrower
- Some smart uses for the loan proceeds are:
- Improve monthly cash flow
- Consolidate high interest debt
- Supplement retirement funds
- Make home improvements
Example of the HECM Zero Compared to a HELOC
|Product Features||HELOC4||HECM Zero5|
|Access funds using part of your home equity||✓||✓|
|Monthly Mortgage Payments Are Not Required||✓|
|Can't owe more than home is worth at time of sale||✓|
|Unused credit line will grow annually||✓|
|Line of credit cannot be reduced by lender||✓|
|No minimum FICO score requirements to qualify||✓|
1 You must live in the home as your primary residence, continue to pay required property taxes and homeowners insurance, and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that results in foreclosure.
2 The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.
3 Principal limit is the total amount of equity the borrower can access. Initial disbursement may not exceed the greater of 60% of the principal limit or mandatory obligations, as defined by HUD Mortgagee Letter 2013-33, plus 10% of the principal limit.
4 The rate information was obtained from mybanktracker.com on 4/17/17 and is based on an average Annual Percentage Rate (APR). The rate is based on a $30,000 HELOC average. The average is based on banks tracked on MyBankTracker.com: http://www.mybanktracker.com/heloc?ZoneID=Quick_Links&ProductID=Mortgage-HELOC.
5 This example is based on the youngest borrower, who is 63 years old, a variable rate HECM loan with an initial interest rate of 5.480% (which consists of a Libor index rate of 0.990% and a margin of 4.490%). It is based on an appraised value of $260,000, origination charges of $4,600, a mortgage insurance premium of $6,500, other settlement costs of $2,688, a lender credit of $8,463, and a mortgage payoff of $68,923; amortized over 240 months, with total finance charges of $269,432.19 and an annual percentage rate of 7.67%. Interest rates may vary. The stated rate may change or not be available at the time of loan commitment or lock-in. Since the initial disbursement at closing is greater than 60% of the principal limit the mortgage insurance premium is based on a rate of 2.50%, which is a percentage of the lesser of the appraisal value, the purchase price or the maximum lending limit.