For many seniors, making your money stretch throughout your post-working life can be challenging. But if you own your house, you might have a ready-made solution in your home’s equity. By using a home equity conversion mortgage (HECM), a type of reverse mortgage that is insured by the Federal Housing Administration (FHA), you may be able to tap into the equity in your home to help fund your future.
To help clear up misconceptions, here is a brief overview of these loans, how they work, and how to determine if it’s the right choice for you.
How a Home Equity Conversion Mortgage Works
Home equity conversion mortgages make up most reverse mortgages. There are a variety of good reasons why HECMs are attractive choices.
- They’re insured by the FHA, which has imposed rules and regulations that help safeguard borrowers.
- They allow borrowers to take a cash advance based on the equity in their home and provide flexibility in how they receive that cash advance.
The money you take out can be used for nearly any purpose. And you can take your money in either:
- A single lump sum.
- A monthly cash advance for as long as you occupy the home (tenure) or a set amount of years (term).
- A specified credit line that you withdraw from when needed.
- Some combination of these three options.
How Big of a HECM Loan Can I Get?
The amount of your HECM loan will depend on your age, current interest rates, and your home’s value. The maximum HECM loan amount in 2021 is $822,375.
One of the most advantageous characteristics of the HECM loan is that its credit line grows if you have a credit balance. For example, if you were to take a HECM line of credit for $150,000 and withdraw $20,000 the first year, you’d have a balance of $130,000 left. However, the $130,000 grows at the same interest rate you’re being charged on your loan balance. Let’s say your interest rate is 5%. The following year, your new total credit line to draw from would be $136,500 ($130,000 x 5%).
Assuming there is no qualifying non-borrowing spouse, the loan must be repaid when the last remaining borrower dies or sells the home. At that time, the sale of the home repays the HECM loan. However, if your heirs would like to keep the home, they have the option to pay off the loan.
Who Qualifies for a HECM Loan?
To take out a HECM loan, you must meet some qualifications:
- You and your spouse or another owner of the home must be 62 or older.
- You must live in the home as your primary residence.
- You can’t be delinquent on any federal government debt
- Your home must be a single-family, a unit in an up to four-unit dwelling, a Housing and Urban Development (HUD)-approved condo, or certain manufactured housing. Manufactured homes must be built after 1976, must be on a permanent foundation & must be taxed as real property. Some lenders do not accept single-wide manufactured homes.
- New construction is also available as long as building is complete at the time the appraisal is done. Certificate of Occupancy is required from the city/county.
- You must meet with a HUD-approved counselor to discuss your loan.
You also will need to maintain the home and pay the property taxes and homeowner’s insurance.
How to Apply for a Home Equity Conversion Mortgage
You can search online for a HECM lender on HUD’s website or inquire with your bank or credit union to see if they are a HECM-approved lender. The application process is straightforward and can take about the same time as a traditional forward mortgage.
Your lender will ask for various income and asset documents, such as tax returns, pensions, Social Security statements, and bank statements. They will also check your credit. You’ll also be set up with a mandatory counseling session with a HUD-approved counselor, and your home will be appraised.
Your lender will likely discuss any fees you will pay or have rolled into your loan at closing. These can include origination and servicing fees from your lender (the only fees the lender can charge for a HECM loan), as well as fees to a third party for a title search, appraisal, or inspection.
HECM vs. a Private Reverse Mortgage
HECM loans are insured and regulated by the FHA, have maximum limits according to your county and state, and require you to carry mortgage insurance. Private reverse mortgages can have higher principal limits and could be the better choice for those with higher home values.
The Evolution of HECM Loans
If your only knowledge of reverse mortgages is from an infomercial or rumors about folks who were scammed, it’s understandable you’d be wary of these loans. However, the HECM loan has some consumer protections built into the loan programs.
Some newer rules include capping the amount advanced during the first year, limiting loan origination fees to $6,000, and allowing eligible non-borrowing spouses to stay in the house after the borrower dies or moves to a nursing home or assisted living facility. Additionally:
- 1998–HECM loans became permanent.
- 2001–AARP AARP and HUD teamed up to train counselors.
- 2005–The first HECM refinance loans became available.
- 2010–The HECM Saver with lower mortgage insurance premiums and closing costs were available but have been discontinued.
- 2013–HUD again changed rules to make the HEMC loan safer.
- 2020–HUD changed the maximum claim amount you can borrow to $822,375 from $765,600.
- 2021–HUD added protections for non-borrowing spouses.
HECMs are available in all 50 states, the District of Columbia, and Puerto Rico. By understanding the benefits of a HECM, you can know what to expect and how this financial tool can assist you in your retirement planning. As always, it’s wise to consult a financial advisor as you map out your future.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.