What is a Home Equity Conversion Mortgage?

Home Equity Conversion Mortgages can help seniors to meet their financial needs.

Retirement can be a challenging season of life for many, especially when income drops and savings begin to run low. While some people do accumulate much wealth in various kinds of liquid investments, others have the largest portions of their net worth tied up in fixed assets, particularly real estate. The Home Equity Conversion Mortgage, or HECM, exists to allow seniors to access the equity in their homes, helping to relieve the burden of living expenses.

Restrictions

In order to qualify for an HECM, you must meet a set of criteria defined by the Federal Housing Administration. As q borrower, you must be at least 62 years old, occupy your home as a primary residence, and carry only a small mortgage or own your house outright. You may not be delinquent on debt to the federal government and you must participate in an HECM information session.

Format

Receiving payment from an HECM can be arranged in one of five formats. Tenure payments are equal monthly payments that continue until the home no longer serves as a primary residence for the borrower, as in the case death or sale of the home. Term payments are equal monthly payments made for a fixed number of months. A line of credit, the third option, can be opened to allow for free access to funds up to a predetermined credit limit. The final two options are simply a combination of either term or tenure payments with a line of credit. Repayment on the balance of the loan is made when the house is sold, no longer functions as a primary residence or in the event of death.

Costs

There are five separate types of fees associated with opening an HECM, all of which the borrower may finance through the proceeds of the mortgage. The origination fee collected by the lender varies depending on the value of the home, but cannot exceed $6,000. Closing costs can accrue as well, including property appraisal and inspection fees, title search and insurance, mortgage taxes, and fees for a credit check, among others. The FHA charges a fee for insuring the mortgage equal to 2 percent of the value of the home up front plus 1.25 percent of the mortgage balance charged annually over the life of the mortgage. Lenders will also charge a monthly loan servicing fee capped at $35 each month. Finally, and most significantly, the loan accrues interest based on the terms set for the loan.

Considerations

When deciding whether an HECM is right for you, be sure to consider your circumstances carefully, particularly your current age, how long you expect to live in your current residence, how you will pay off the loan when it becomes payable, other financing alternatives available to you, and whether the sizable costs of this mortgage are outweighed by the benefits provided in receiving loan payments.

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