Using Home Equity Conversion Mortgages (HECM) in the USA

Interest rates continue to remain low for those wishing to finance a new home or refinance their existing property. According to bankrate.com, the current average for a thirty year fixed mortgage is 3.57% for a new loan and 3.65% for a refinance. Rates for a fifteen-year fixed mortgage and a 5/1 adjustable rate mortgage average 2.93%. Many are choosing to take home equity loans to get additional funds from their property’s equity to help with expenses.

For those over age 62, there is a different approach to cashing in on a home’s equity. A Home Equity Conversion Mortgage, or HECM, is the FHA’s reverse mortgage program. Touted by celebrities, they can be a way for older homeowners to supplement their income or pay expenses. HECM’s are a specific type of loan that allows homeowners to convert their property’s equity into cash. Unlike a home equity loan, these loans do not require repayment until the owner no longer occupies the home due to death, disability or sale of the property.

How to Qualify for a Home Equity Conversion Mortgage

To qualify for an HECM, the home must be free of mortgage obligations or have an outstanding balance low enough to be paid off at the closing with the proceeds of the HECM (hud.gov). The owner must be at least age 62 and continue to reside in the home.

According to the HUD website, there are four things determining the amount of money available:

  • The age of the youngest borrower
  • Current interest rates
  • The lesser of the appraised value or the HECM FHA limit of $625,000
  • The choice of initial Mortgage Insurance Premium

The older the borrower, the lower the rate and the higher the property value will result in the greatest loan amount. Payments can be made in set installments, like an annuity, as a line of credit, or a combination of the two.

Risk of Home Equity Conversion Mortgages

While there are benefits in the short run, it can be a risky long-term venture. Once the borrower can no longer reside in the home, the loan must be repaid. In some cases, the children of the borrower are unaware that there is a lien against the home when the property is sold. This can mean there is no equity to pay for expenses or to pass onto future generations. There are also a number of disreputable firms claiming to make HECM’s. Those wishing to use an HECM should check the HUD website for a list of providers.

As life expectancies rise, pensions dwindle and costs continue to rise, HECM’s can be an attractive way for seniors to obtain funds for expenses. As with any loan, seniors should be fully aware of the advantages and risks before signing any paperwork.

Additional Sources:
http://www.bankrate.com/finance/mortgages/never-old-mortgage-1.aspx
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten

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