Through the years, reverse mortgages have gotten a bad reputation. In particular, many people think that reverse mortgages prey on seniors. Sadly, some unscrupulous lenders have preyed on seniors, but that definitely does not apply to all reverse mortgages.
As long as you understand the terms of the loan, a HECM loan can be a great option. Here’s what you need to know to protect yourself.
HECM Loans Versus Traditional Reverse Mortgages
HECM stands for home equity conversion mortgages, and these loans are a specific type of reverse mortgage insured by the Federal Housing Administration (FHA). To qualify as a HECM reverse mortgage, the loan must meet certain criteria, and if a loan qualifies, it’s backed by the federal government.
That extra assurance allows lenders to grant these loans to borrowers who might not be able to qualify in ordinary circumstances. Traditional reverse mortgages don’t have that same built-in security for you or the lender.
How HECM Reverse Mortgages Work
These loans are called home equity conversion mortgages because they convert your home equity into cash. In other words, a reverse mortgage is where the bank slowly buys back your home from you. You don’t make payments to the bank. Instead, the bank gives you money every month.
In some cases, these loans can be structured like lines of credit. Basically, the lender makes the funds available to you, and you can spend them when and as you wish, similar to a credit card.
Homeownership and Reverse Mortgages
When you take out a HECM loan, you get to stay in the house until you pass away or decide to move out. The bank cannot preemptively take your home. However, it’s important to understand that the bank is effectively buying your home. If you die, the house does not pass to your heirs.
Any money remaining on the loan can go to them, and in some cases, they can opt to pay off the bank to keep the home. However, for most intents and purposes, when you take out a reverse mortgage, you are trading your equity for cash now, and you are basically selling your home slowly, while preserving your right to stay in the home as long as you need.
Qualifying for a HECM Mortgage
In order to qualify for a HECM loan, you have to be over 62 years of age. If the home is jointly owned, you should wait until both owners are over the age of 62. If you take out the mortgage in just one person’s name, that could cause issues for the co-owner if the primary person on the HECM loan dies or moves to a nursing home. Additionally, you need to own your home outright or owe very little on your existing mortgage.
Typically, the home needs to be a single family home, but you can also take out HECM loans on condos and manufactured homes, as long as they meet the criteria established by the US Department of Housing and Urban Development. Additionally, you can take out a HECM loan on a two to four unit building as long as you live in one of the units.
Although reverse mortgages have developed a bad reputation in some situations, HECM reverse mortgages can be extremely useful. If you own your own home and you’re looking for ways to boost your cash flow during retirement, you may want to consider this type of program. To get started, work with a reputable lender such as BrightPath. We look forward to answering your questions today.