Equity Conversion: Everything You Need to Know
A home equity conversion mortgage, or HECM, is one kind of insured reverse mortgage through the Federal Housing Administration.3 min read
A home equity conversion mortgage, or HECM, is one kind of insured reverse mortgage through the Federal Housing Administration. The HECM is a helpful financial tool that meets the various needs of those who own homes that are older than 61 years old. They are also flexible and allow for variation in the ways seniors get funds, as they have changing needs over the years. This type of mortgage is popular and comparable to other reverse mortgage products that are privately sponsored and offered by banks.
How HECMs Work
HECMs let seniors convert their home equity into cash. How much they can borrow is dependent on the home's appraised value, which is subject to Federal Housing Administration (FHA) limits. It also depends on how old the borrower is, as they must be at least 62 years old.
In a reverse mortgage, borrowers do not pay the lenders, but rather the lenders pay the borrowers. Money gets advanced towards the home's equity value and interest builds upon the loan balance that's outstanding. However, no payments need to be made on the house until the borrower dies or the home is sold. At that time, the loan must be repaid in full.
What Are the Terms for Reverse Mortgage?
Reverse mortgage terms tend to vary when it comes to reverse mortgage products that are privately sponsored. This allows for borrowing amounts that are higher but have lower prices than HECMs. HECMs tend to offer interest rates that are lower, however. Comparing the economics of a privately sponsored reverse mortgage with an HECM depends on how long the borrower wants to own the home, how long they live for, and their age. Various kinds of reverse mortgages target seniors specifically by having no repayment requirements until the borrow either sells their house or dies.
What is the Maximum Loan Amount?
You can also consider an HECM when comparing a home equity loan. The maximum loan amount is dependent on current interest rates, the age of the borrower, and what the home equity is. This money can be used for various reasons, such as the following:
- Medical costs
- Paying down a debt
- Improving your lifestyle
- Home repairs
You can decide to get a lump sum of cash, receive monthly payments, or get a line of credit. The interest of the loan gets added to the balance, so you won't have to make payments.
Are HECM Reverse Mortgages Adjustable Rates or Fixed-Rates?
HECMs can be a fixed rate or an adjustable rate but only fixed-rate mortgages are offered when the borrower decides to move all their proceeds at the source and nothing is saved for potential future use. This is appropriate in certain cases, such as where the HECM gets used to pay off a decent sized amount of current debt or to buy a house. Borrowers who choose to get monthly payments or hold a credit line for use in the future need to take HECMs with an adjustable rate.
What Are the Requirements to Obtain HECM?
The FHA sponsors home equity conversion mortgages and gives insurance for the products. They also set eligibility and guidelines for the loans. Borrowers can only get HECMs from the banks where the product is sponsored by the FHA. The HECM reverse mortgage is a great product for the right person, but it's not applicable to everyone. Before you think about applying for an HECM, you'll need to attend a consumer information session that has an HECM counselor who has been approved by the Department of Housing and Urban Development.
There isn't a minimum credit score requirement or a set amount of income needed to obtain an HECM. However, the lender needs to evaluate if they're able to pay their insurance, property taxes, and property maintenance. They'll need to fill out an application providing the requested information and meet all the requirements of the product. The requirements are dependent on the borrower's financial situation, profile, and the collateral value of their property. They need to be a minimum of 62 years old and have a property that has been paid off significantly with substantial equity available.
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