A home equity conversion mortgage (HECM) can help seniors access the equity they’ve built up in their homes to help secure their retirement. These loans have evolved over the years and are now powerful financial tools. Still, these loans aren’t the right choice for everyone, so it’s important to understand how HECMs work, and the pros and cons of a HECM.
What Is a Home Equity Conversion Mortgage?
A HECM is the only type of reverse mortgage insured by the Federal Housing Administration. This reverse mortgage allows individuals aged 62 and older to borrow against a portion of the equity in their home. This money can then be used for home improvements, to pay off credit card or medical debt, fund a grandchild’s education, or generally, however you choose. The loan can also be structured as a line of credit that can be accessed if the need arises.
Note that borrowers are required to pay for things like homeowner’s insurance, property taxes, and the upkeep of the home. Other fees and conditions may be outlined as requirements in the terms of the loan. It’s best to consult with an independent financial advisor to determine what is right for you and your retirement.
As with any financial decision, you’ll want to make sure you understand the ins and outs of these loans. Here is a brief overview of the pros and cons of a HECM.
Pros of a HECM
For a wide range of reasons, a HECM can be a good match for many retirees. Some of the benefits include:
- You no longer pay monthly mortgage payments.
- You can remain in your home for as long as you meet the loan’s requirements.
- You’ll receive loan proceeds that, generally, you can spend on whatever you want or need.
- You can ask for this money in a lump sum, as equal monthly payments, as a line of credit, or any combination of the three.
- The loan pays off the remaining balance on your existing mortgage.
- There is no minimum credit score required for a HECM loan.
- Your name remains on the title of your home.
- If your spouse is listed as a co-borrower, they can remain in the home after you pass away, and the loan does not need to be repaid until they pass away, move, or sell the home.
Cons of a HECM
These reverse mortgages do have some downsides, so they won’t always be the right choice. These include:
- You may pay several fees, including upfront and annual mortgage insurance premiums, third-party costs (like appraisals, surveys, inspections, etc.), origination fees, and servicing charges.
- When you leave the home, whether you sell it, no longer occupy it as your primary residence, or pass away, the loan balance must be repaid.
- The loan will become due and payable and can be foreclosed, if you don’t pay the property taxes, homeowners’ insurance, any homeowner’s association (HOA) fees, or if you let the house fall into disrepair or otherwise fail to uphold the terms of the loan.
As you plan for your retirement, a HECM may be a good choice, but you need to do your research and consult with a financial advisor to make sure it’s suitable for your circumstances.
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.