For the past three weeks, I have been reviewing the different loans that are out there, and what might work best for you. There is the conventional loan, FHA loan, VA loan, and the Home Equity Conversion Mortgage (HECM).
Of these four loans, the Home Equity Conversion Mortgage (HECM) is not used to purchase a home. It is generally more of a home equity loan for older homeowners. It does not require monthly payments and instead lets the borrower convert a portion of the equity in their home into cash. Equity may be paid out monthly for a fixed period, as a lump sum, or as a line of credit.
Just know you must be over 62 years of age and there has to be enough equity in the home to tap. To qualify for a reverse mortgage, you should have at least 40% equity available in your home. If there's an existing mortgage, you also must have enough equity to pay off the remaining mortgage.
The Center for Retirement Research believes a reverse mortgage makes sense for people who don't plan to move, can afford the cost of maintaining their home and want to access the equity in their home to supplement their income or have money available for a rainy day. Some people even use a reverse mortgage to eliminate their existing mortgage and improve their monthly cash flow.
However, before you apply there are a few things you must consider. They can be a little more expensive than other mortgage products and may affect eligibility for Medicaid and Supplemental Social Security Income benefits.
The (HECM) is there for people who may want to live a higher standard of life while settling into retirement. I often advise those who may have higher life insurance coverage to only borrow up to the amount their life insurance can cover, allowing the mortgage to be repaid after their passing so that their home may be passed along to children, loved ones or even left to the charity of their choice.
If this is a choice you would consider, it’s generally better to discuss this mortgage with your children so they may know what they will be dealing with at your passing, This will allow them to pay off the remaining balance in the home so that it can be passed down to them.
To recap, the Home Equity Conversion Mortgage is a tool to be used for those over the age of 62 who have a large amount of equity in their home and would like to use some of that equity. The money you take out during your life must be paid off at death through either insurance or your family repaying the loan. Like any other loan, it is not for everyone and you should consult with a professional before applying.
At WLM Financial our goal and my dream is to teach people how to get in the position to be financially free, and with a little bit of hard work and endurance you can get there.