Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About HECM
A Home Equity Conversion Mortgage (HECM), and is the only reverse mortgage insured by the U.S. Federal Government and it is available through an FHA-approved lender.
HECM is the FHA’s reverse mortgage program and it enables you to take out a portion of your home equity.
Conversion Mortgage (HECM), is a Federal Housing Administration (FHA) insured loan and is commonly known as a reverse mortgage.
It enables seniors to obtain tax-free funds without having to make monthly mortgage payments by accessing a portion of their home’s equity.
Borrowers still own their homes with a HECM loan. When senior homeowners need extra funds to supplement their retirement income then reverse mortgage loans can be beneficial.
Let us see what is The HECM for Purchase or Home Equity Conversion Mortgage for Purchase
In 2009 FHA introduced HECM for Purchase loans and allow homeowners who were 62 and above to purchase a new home using the reverse mortgage loan.
A borrower must be at least be 62 years old and have significant equity in their home to qualify for a reverse mortgage loan.
The borrower must have enough funds to make the initial down payment in a HECM for Purchase.
Depending on various factors the down payment needs to be 35-50% or more of the purchase price. The homeowner is required to maintain the home and pay property taxes and insurance with all HECM loans.
When the homeowner either passes away or no longer lives in the home full time then the loan becomes due.
Few factors, which determine the amount of money the borrower can receive with a HECM for Purchase are:
- The age of youngest borrower or non-borrowing spouse,
- Current interest rates and
- The lesser of the appraised value of your home and not the actual market value
- The sale price or the
- Maximum lending limit.
Generally, the older the borrower is, the more money they would qualify for. Please understand, a reverse mortgage loan is not for everyone and not everyone will qualify it.
Advantages of HECM for Purchase
- Homeowners can buy single-story, handicap accessible, etc that fits their needs.
- Homeowners can move closer to family, friends, medical facilities, etc.
- Homeowners can preserve their cash and still purchase a new home.
- Borrowers are excused from paying any monthly mortgage payments for the life of the loan.
Disadvantages of HECM for Purchase
- Over a period of time, the loan balance grows.
- The possibility of no equity left in the home when the loan becomes due also needs to be taken into account.
- After the loan is repaid, the borrower or their heirs will receive what is left of the equity in the home. Usually, there is minimal or no equity left in the home.
How Does it Work?
First, the loan amount is determined by the lender, by using a formula set out by FHA that takes into account the value of the home, the age of the borrowers, and the current interest rate to determine the loan amount.
Usually, it is anywhere between 40 – 60% of the home value depending on your age. Once they identify your, qualifying amount they will check how you would want to take your money at the closing?
Costs of the loan will be wrapped into the loan, so you will have a starting balance equal to those costs plus any other funds you take.
You can take your loan proceeds in the form of a monthly payment for as long as you live in the home.
The lender will give you tax-free funds on the first of every month. You would be receiving a mortgage statement showing you the prior month’s loan balance, the amount of interest and insurance charged, and the new loan balance.
Or you could like to take all your loan funds which are ready and available, as you need them in a line of credit.
In this scenario, you would receive a statement each month from the lender showing the existing loan balance and the number of funds previously available in the line of credit.
Any withdrawals you made from the line of credit the prior month and the new available line of credit would show in the statement.
One of the coolest features of this particular scenario is that the line of credit on the reverse mortgage grows over time.
The amount available to you and the loan of credit is equal to the rate charged on the loan itself plus one and quarter percent.
A reverse mortgage line of credit in the amount of $100,000 would be over one hundred and four thousand the next year.
It is a great incentive to limit your withdrawals building up that line of credit over time so that when you are 70, 80, and 90 and in dire need of money for any health emergencies you can withdraw more.
You can also use up all the money to purchase a second residence or invest in property. You can also combine those different payoff options.
Conclusion
Now you know the versatility of the HECM home loan program, it will help meet your individual financial goals and needs.
You can clear off your existing mortgage payments, pay off other debts, or add to your existing retirement income or assets.
While HECM is not always the perfect solution for everybody, it is a great option for the right individual. You can easily protect and preserve your retirement lifestyle with HECM home equity.
