HECM stands for Home Equity Conversion Mortgage. This type of mortgage has been available to homeowners since 1961 and has been insured by the Federal Housing Administration (FHA) since 1988. A HECM is designed for homeowners ages 62 and older and allows them to tap into some of the equity in their home. This cash can be accessed without having to sell or move out of the home, and without having to make monthly mortgage payments. Keeping current with property taxes, homeowners’ insurance, HOA dues, and home maintenance is required.
HECM loan amount calculations are subject to maximum claim amounts which can change year to year. In 2024, the maximum claim amount is $1,149,8251. Note that this does not represent the maximum loan amount. It is the starting point to determine the maximum loan amount based on borrowers’ age and current interest rates. In other words, homes valued greater than the maximum claim amount will not have access to more proceeds under the HECM.
HECMs are the most common type of reverse mortgage, and the only type of reverse mortgage insured by the Federal Housing Administration (FHA). HECMs boast many advantages to borrowers, including optional monthly mortgage payments2, a growing line of credit3, non-recourse loan protection8, and no income limitations. The proceeds from a HECM reverse mortgage can be used for any purpose.
Advantages of a HECM include:
·No monthly mortgage payments required.
·You continue to own your home.
·You choose how you’d like to receive your funds:
o A one-time payment, income tax-free4
o Steady, income tax-free monthly payments4
o A line of credit3
o Any combination of these
·Independent, HUD-approved counseling to help you understand your options.
Use the cash for whatever you need most:
·Keep up with everyday bills and living expenses.
·Consolidate credit cards or other debts.
·Help with healthcare costs, making it easier to “age in place”.
·Set aside funds for unexpected expenses or long-term care.
·Make home updates, repairs, or modifications to live more comfortably.
·Help family members with major expenses.
·Hedge against market erosions in portfolio or inflationary pressures.
·Reduce distribution rate on the retirement portfolio, allowing it to continue to grow9.
HECM Line of Credit
The line of credit is a unique feature of the HECM program and offered through the variable-rate option. Unlike a traditional mortgage, a reverse mortgage line of credit can never be reduced or frozen5 and there is no prepayment penalty. In fact, the unused portion of the credit line is guaranteed to increase over time3 and will grow at the same rate as the interest accrued on your outstanding loan balance. Exclusive to the HECM reverse mortgage program, this feature continues to be a very popular option for accessing funds among homeowners as a way of prolonging the longevity of other investments in their portfolios.
Methods of distribution of HECM funds
Single Lump Sum – Many homeowners decide to use their reverse mortgage proceeds to pay off an existing mortgage or to buy a new home. In this case, a single lump sum payment typically works best.
Line of Credit – Some homeowners don’t have an immediate need for cash but want to establish a line of credit3 for peace-of-mind. This is a great option should you need to access cash in the event of an emergency or unexpected bills.
Term Payments – Retirees supplementing their monthly funding often choose term payments. This provides equal monthly payments for a fixed period of their choosing. Shorter terms will receive larger monthly payments than longer terms.
Modified Term – A blend of both term payments and a line of credit, modified term allows homeowners to receive scheduled monthly payments while holding funds in reserve as a line of credit.3
Tenure – Homeowners choosing the tenure option will receive equal monthly payments as long as one borrower on the loan still lives in the property as their primary residence6.
Modified Tenure – Similar to modified term, modified tenure is a blend of tenure and a line of credit. Homeowners choosing this option can expect smaller scheduled monthly payments along with an available line of credit.3
Benefits of the HECM continue until a borrower sells the property, no longer uses the property as their principal residence, or dies, which is called a maturity event7. HECM is a non-recourse loan, meaning that a borrower is not responsible for any shortfall if the loan amount exceeds the value of the property8.
In all, the HECM reverse mortgage loan offers a variety of options for distribution of funds, providing retirees tremendous flexibility to customize a solution that best meets their financial needs in retirement. An in-depth review of the financial picture of a retiree enables us to customize a solution that will best meet your needs.
Footnotes and Estimated Posting Dates:
1 https://singlefamily.fanniemae.com/originating-underwriting/loan-limits Note that FHA uses the high balance loan limits nationwide.
2Borrower must meet the terms of the loan, which includes keeping current on property taxes, insurance, HOA dues, and home maintenance. It is possible to make payments on a HECM
3 Line of credit option is only available for adjustable rate HECM products. If part of your loan is held in a line of credit upon which you may draw, the unused portion of the line of credit will grow in available line amount each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan. See Reverse Mortgage Line of Credit Growth Feature
4 Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits. See Tax Strategies
5 See Standard Heloc vs. Reverse Mortgage Line of Credit
6 See Spouses and Reverse Mortgages.
7 See What to do when the loan comes due. (7/30/24)
