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Home Equity Conversion Mortgage (HECM)

Definition

The Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that is federally insured and backed by the U.S government. It allows homeowners aged 62 years or older to convert a portion of their home’s equity into cash or a line of credit. The loan does not have to be repaid until the homeowner dies, sells the house or moves out.

Phonetic

The phonetic pronunciation of “Home Equity Conversion Mortgage (HECM)” can be expressed as:hohm eh-kwuh-tee kuhn-vur-shuhn mor-gij (HECM – heck-um)

Key Takeaways

<html><body><ol><li>The Home Equity Conversion Mortgage (HECM) is a Federal Housing Administration (FHA) insured reverse mortgage. It allows homeowners aged 62 and older to convert a portion of their home equity into loan proceeds, which can be received in a variety of ways according to their preference.</li><li>HECM loans have a non-recourse feature, meaning the principal amount cannot exceed the home’s value at the time of repayment. The homeowners or their estate aren’t required to repay more than the home’s value, even if the balance exceeds it. This feature protects borrowers and their heirs from owing more than the value of the home.</li> <li>It’s important to note that with a HECM loan, the borrower is still responsible for property taxes, homeowner’s insurance, and maintaining the home. Failure to meet these responsibilities can lead to default and possible foreclosure.</li></ol></body></html>

Importance

The term Home Equity Conversion Mortgage (HECM) is important in business/finance as it refers to a type of reverse mortgage that is government-insured under the Federal Housing Administration (FHA). This financial product allows homeowners aged 62 or older to convert a portion of their home’s equity into cash, a line of credit, or a fixed monthly payment without having to sell their home, vacate it, or make additional mortgage payments. This can greatly assist in providing financial security during retirement, helping to cover unexpected medical costs, home repairs, or everyday living expenses. However, it also affects the inheritable wealth for heirs, potentially leaving less monetary value from the home for the offspring, thus it requires careful consideration. Therefore, HECM’s importance lies in its potential to provide significant financial support, while also having substantial estate implications.

Explanation

The Home Equity Conversion Mortgage (HECM) serves a critical role for older homeowners who are looking to improve their financial standing in retirement. Most commonly used by senior citizens, it is a type of reverse mortgage that allows them to convert a portion of the equity in their homes into cash while still maintaining ownership. This can provide a valuable source of income for retirees who have invested a significant amount in their homes over their lifetime. The use of HECMs can be varied, addressing a wide range of financial needs. A few common uses include supplementing retirement income, covering the costs of home improvements, paying for medical expenses, or even as a strategy for financial planning. In other words, HECCs act as a flexible financial tool. It’s important to note that while HECMs can provide many benefits, they also come with their share of risks and costs. Therefore, homeowners should fully understand these implications and consult with a financial advisor before deciding to proceed with a HECM.

Examples

1. Mr. and Mrs. Smith are retirees who own a valuable home in Florida but don’t possess much savings. They opted for a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage – which allowed them to remain in their home and receive monthly payments from the bank, which adds these payments to the loan balance. These payments helped immensely in meeting their daily living expenses.2. Mrs. Davis, a 72-year-old widow, lives alone in her fully-paid house in California. To cover her increasing medical bills and maintain her living standard, she applied for a HECM. With this, she chose a line of credit option that she can draw upon at any time.3. Mr. Johnson, an entrepreneur, wanted to invest in a new business venture without selling his house. He took out a Home Equity Conversion Mortgage on his primary residence that had a high equity value. By doing so, he turned part of his house’s equity into cash without having to sell or move out, resulting in the money needed for his investment.

Frequently Asked Questions(FAQ)

What is a Home Equity Conversion Mortgage (HECM)?

A Home Equity Conversion Mortgage (HECM) refers to a reverse mortgage loan for homeowners who are 62 or older. This type of mortgage allows homeowners to access a part of their home’s equity as funds, without having to make monthly mortgage payments.

Who is eligible for a HECM?

In order to be eligible for a HECM, homeowners must be 62 years of age or older, own their property outright or have a low existing mortgage balance that can be paid off with the reverse mortgage loan, and occupy the home as their primary residence.

How does a HECM work?

A HECM works by converting the equity in your home into cash. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to you.

What are the benefits of a HECM?

The benefits of a HECM include the elimination of monthly mortgage payments, access to cash for any purpose such as healthcare expenses or home improvement, and the ability to stay in your home for your lifelong.

What are the risks involved in a HECM?

Higher up-front costs than other borrowing options, risk of foreclosure if the borrower fails to meet the obligations such as paying property taxes, insurance, and maintaining the home, and the loan balance increases over time as interest on the loan and fees accumulate.

How can one apply for a HECM?

To apply for a HECM, homeowners should meet with a HUD-approved counselor who can help them understand the process and their options. Then they can apply through a FHA-approved lender.

Does the homeowner give up ownership with a HECM?

No, the homeowner retains full ownership of the property. The lender never takes control of the title. The home can still be passed on to heirs, but the loan must be paid off, usually by selling the home.

How will I receive the proceeds from my HECM?

Borrowers can choose how they want to receive their payments, either as a fixed monthly amount, a line of credit, a combination of both or a lump sum.

How is the HECM loan repaid?

The HECM loan does not need to be repaid until the homeowner leaves the property, sells the home, or passes away. At that point, the mortgage, along with any interest and fees, must be repaid. Typically, this is done by selling the home.

Related Finance Terms

  • Principal Limit Factor (PLF)
  • Reverse Mortgage Loan
  • Mandatory Obligation
  • Mortgage Insurance Premium (MIP)
  • Non-Recourse Loan

Sources for More Information

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