Everything You Need to Know About a Home Equity Conversion Mortgage
Photo by Tierra Mallorca
Could a home equity conversion mortgage be right for you?
If you’ve been looking into a reverse mortgage, or are just curious about your options in retirement, chances are you’ve stumbled across a home equity conversion mortgage. You might not know what it is or how it works, but you definitely should.
What exactly is it?
While it may have mortgage in the name, it is actually quite the opposite. Believe it or not, a home equity conversion mortgage is actually a loan designed for those above the age of 62 years old.
This places it in the senior category, but you know what they say, 60 is the new 40. If you truly want to live out your senior years to the best of your ability, then a home equity conversion mortgage might be the financial vehicle to get you there.
It is not for everyone, but the beauty of a loan like this is that you have no obligation to pay it back while you’re alive. Sure, your estate will likely be held accountable, but you’ll never have to worry while you’re alive.
In some cases, it can truly be a stress free way to free up some money.
Most people have a lot of value in their homes, and you’re probably no different. It’s one thing to know your home is worth half a million dollars, but what if you could access it?
That’s the purpose of a home equity conversion mortgage. You may also have seen it written as HECM, so hopefully that clears up any confusion. If you’re curious about how exactly a HECM loan works, or if you’re curious about taking one out, then please pay very close attention.
So without wasting anymore time, let’s dive right in, and take a look at everything you need to know about HECM loans.
How does a home equity conversion mortgage work?
Now that you sort of know what it is, you’ll probably want to know exactly how it works. These can be very tricky, so it’s important that you pay close attention and understand the facts. You also need to think of this as a loan, as opposed to a mortgage. Luckily, if the word loan startles you, you won’t have to worry about it while you’re alive or living in the home.
Think of it as a reverse mortgage type loan.
This might sound a bit confusing at first, but it’s really quite simple when you think about it. A HECM loan is essentially using the equity of your home as a loan. The loan is generally paid in payments, just like a mortgage, and is paid back by your estate.
The reason this loan is designed for people over the age of 62, is due to the fact that it can help supplement your retirement plan. Plus, if you don’t have a plan in place, a home equity conversion mortgage can quite literally be the difference between just surviving or thriving.
Do you need to pass a credit check?
Back in the good old days, there was really no type of credit check or accountability. This created a wild west scenario with these loans, because people started to forget about their property taxes. Obviously that wasn’t a great thing, so HUD did place some standard requirements.
If you want to be eligible for a home equity conversion mortgage, you need to have:
- A single family or a 2-4 unit property
- A state approved condominium (FHA)
- The home should be a permanent residence
- You need to pay attention to your property taxes
Every area has different regulations, so make sure you understand those clearly.
How do you receive funds?
There are many ways that the loan can be paid out to you. You can receive a lump sum, a line of credit to draw from, monthly payments for a set term, or monthly payments for life. You can also have any combination of these payment options, like a line of credit plus monthly payments, for instance. You can always increase, decrease, or cancel any payments after receiving your loan.
You should also be aware of the structure of these loans, and how they impact the payments you receive. You’ve probably heard the word “fixed” being thrown around, and that’s a common method of receiving funds. You should really only focus on a fixed term, because it will allow you to maximize your monthly benefit.
For example, if you choose a 20 year term, your benefit will be level through the course of 20 years. Plus, believe it or not, the interest rate will be as well. This allows a plan to be flexible, but also maintain a certain level of safety.
In retirement the time to take risks has come to an end, so make sure you go the safe route this time around.
Why a home equity conversion mortgage might be a good choice for you
These loans might not be for everyone, but believe it or not, most people can receive some type of benefit from them. It really depends on your financial situation, but knowing the benefits is definitely an important factor in the way you proceed. So let’s take a look at 3 reasons a HECM loan might be right for you.
You need a retirement supplement
If you need extra cash in retirement, or if social security just isn’t cutting it (which is usually doesn’t), then this might be a great option for you. It can provide you with a very solid monthly income that you can use for whatever you’d like. Plus, as long as you live in the home, you don’t need to worry about paying it back. You can choose the term option you like, and just set it and forget it.
If you have a 401k, this can help you obtain the maximum contribution (which is achieved when you wait until age 70 to draw funds). This is a great thing, because it will make sure you never outlive your retirement. You can also use this for something commonly referred to as social security maximization. If you didn’t know that you can holdout on your social security to get a larger monthly income 5 years later, now you do. If you wait until you’re forced to draw from it, just like a 401k, you can receive a much higher monthly income.
As we live longer, the fear of outliving our wealth grows stronger as well. Making sure you have plenty of cash flow is a great way to extend your wealth.
You have no retirement
About 60% of people live out their retirement years in poverty. You know the story, the one where a parent needs to move back home with their kids. Not only does this create a burden on your children, it could also make you feel like you failed. Nobody wants to feel like a failure, and you shouldn’t either.
If you’re part of that 60%, or are scared you might fall into that category after a decade of retirement, then a home equity conversion mortgage might just be your saving grace. It can make sure you don’t sell your house, and can help you spare future generations the stress of taking care of you financially.
You want to travel in your retirement years
Everyone wants to see the world before their time is up, and that shouldn’t be any different for you. You spend your whole entire life working to make sure you retire comfortably, but sometimes that just isn’t enough. You might be able to retire comfortably, but ask yourself if you can truly enjoy it.
If you’re someone who wants to see new things, visit a new destination, or return to a place you once loved, then a home equity conversion mortgage might be the best way to get there. You’ll find that this type of loan can free up the funds you need to truly enjoy retirement, and relax while you do do.
While there might be a negative stigma behind a reverse mortgage, you’ll find that a lot of that is due to poor education about the financial vehicle.
Why is there a negative stigma about a home equity conversion mortgage?
It wouldn’t be fair to you if we didn’t tell you there was a bit of a negative stigma about the industry. Just like other loan industries, the stigma is unavoidable. Luckily, you’ll find that with the right knowledge, a home equity conversion mortgage is a very safe option. So let’s look at the biggest myth about these loans.
They’ll take my house.
That sentence is the biggest myth about a home equity conversion mortgage. While it’s not impossible for you to lose your home, it is extremely unlikely if you go about it the right way.
Remember when we mentioned that you need to live in the house, or have it has your primary residence? Well, believe it or not, people try and cheat the system. Essentially, when you cheat the system, it has consequences.
The consequence? They’ll take your home away.
At the end of the day it makes sense. While it might seem like free money, there are still rules you need to adhere to. Nothing in life is truly free, and if you do things the wrong way, you’ll find that there are consequences.
So if you’re worried about losing your home, don’t worry, because chances are you won’t. Just make sure you understand the home equity conversion mortgage you get into, and follow all of the guidelines. This will allow to have a nice retirement, and keep your house in the process.
While a home equity conversion mortgage might seem intimidating, we hope that we cleared the air a little bit. There may be a negative stigma, but every industry has its own horror stories. If you play by the rules, know the facts, and adhere to the guidelines, you’ll never run into any issues.
While a home equity conversion mortgage is not perfect for everyone, it can truly be a lifesaver for retirement. You don’t need to live below your means.
If your home has equity, why not use it to enjoy yourself?
You work your whole life to retire, and you only get one chance to do it right. Why sit on the sidelines while others enjoy their blissful retirement?
You know the facts.
So the question is: are you ready to make a change?
Let’s make something happen together.