Retirement April 10, 2024

Let Your Home Equity Fund Your Retirement

Struggling with Money? Learn about Home Equity Conversion Mortgages (HECMs)

If you’re low on cash, you might consider a Home Equity Conversion Mortgage (HECM). It’s like a reverse mortgage backed by the government. This means if you meet certain requirements, you can borrow money against the value of your home. The Federal Housing Administration (FHA) guarantees repayment to the lender, so it’s secure.  In recent years, HECMs have become more popular, especially among older folks who need extra cash and plan to stay in their homes forever.

Understanding HECM Rules

To qualify for an HECM, you need to be at least 62 years old. Also, you’ll have to pay back the loan when you move out, sell your house, or pass away. You must own your home or have a significant portion paid off, and it must be your primary residence. Plus, you’ll need to have a session with a counselor approved by the Department of Housing and Urban Development (HUD).

Limits and Considerations

The amount you can borrow depends on factors like your age, current interest rates, and the value of your home. Typically, older homeowners with more valuable properties can borrow more.

HECM vs. Regular Mortgages

Unlike traditional mortgages, with HECMs, the amount you owe increases over time. You’ll still need to cover property taxes, insurance, and upkeep costs. Also, the interest you pay isn’t tax-deductible until you pay off the loan.

How You Get Paid

You can choose to receive HECM funds as a lump sum or in monthly payments or a line of credit. You’re free to use the money as you wish, whether for essential expenses, paying off debts, or enjoying life.

HECMs offer a flexible way to access cash when you need it, especially for retirees looking to boost their income.

Attractive features

An HECM offers some compelling advantages if your circumstances fit:

  • You can plan on staying in your “forever” home, where you are settled, and can perhaps renovate it, allowing you to age in place.
  • You can enjoy a reliable cash flow in order to provide more comfortable senior years.
  • You need not make monthly payments on the loan balance.
  • Your spouse can usually remain in the home even if you die or move to another accommodation.
  • You can pay off debt balances, such as medical bills.
  • You can use the proceeds to pay off existing mortgages and thereby prevent foreclosures.
  • You can avoid paying withdrawal penalties on other retirement accounts.
  • You can fund a grandchild’s education or any other meaningful purpose.
  • Integrated protections limit your heirs’ responsibilities.

But is it right for you?

There are several significant drawbacks, so seniors must take extra care with such an important decision:

  • Fees tend to be high, including upfront financed origination charges of about 2% and around .5% for annual review of mortgage insurance premiums.
  • You could compromise your benefits from needs-based programs, such as Medicaid.
  • You could inadvertently default by failing to meet loan requirements, including by living outside the home most of the year, neglecting property taxes or home insurance, or not making maintenance repairs. An unresolved default might lead to eviction and foreclosure.

Alternative loans may be more appropriate. For example, those under age 62 could use home equity loans (HELOCs). More expensive properties may require a jumbo reverse mortgage, with higher interest rates but no mortgage insurance. By contrast, single-purpose reverse mortgages are cheapest and can be used for specified expenses such as taxes or repairs.

Your financial advisor can help you compare different types of reverse mortgages, payment options and other considerations.