5 HECM Myths...BUSTED!
Remember the game of Telephone you played as a kid? You whispered a phrase into the ear of the person next to you, then they whispered it to the next person, and so on and so on. Finally, when the last person announced the phrase, it was nothing like the original one. What started as "seltzer water" ended as "chocolate milk" or something equally absurd.
The lesson learned? Small misconceptions can make a huge difference. The same goes for a Home Equity Conversion Mortgage (HECM).
You've read about them and watched the TV ads. You've heard the horrible reputation they have from neighbors and friends who tell you ALL THE TERRIBLE THINGS.
Now come and learn how they really work, as I tackle the 5 Top Myths About HECMs.
Myth Number 1: The bank takes your house.
You've likely heard people warn against a HECM like a crier of doom, "You're signing the house over to your bank! The lender owns your home!" It's the most common misconception about HECMs, and it's simply not the case.
First of all, your deed reflects ownership of a home, not the mortgage. Like a conventional 30-year mortgage or home equity loan, HECMs are encumbrances on a property, but they do not stake claim to a home.
The Reality: You will retain the title and ownership during the life of the loan, and you can sell it at any time. The mortgage will not become due as long as you continue to meet loan obligations such as living in the home, maintaining the home according to the Federal Housing Administration (FHA) requirements, and paying property taxes and homeowners insurance.
Myth Number 2: Your home must be free and clear of any mortgages to qualify for a HECM.
Another popular misconception is that before you can get a HECM, you have to pay off your home in its entirety. Actually, a HECM taps into the existing equity, whether or not there is an outstanding mortgage. Furthermore, you can only access a certain percentage of the equity in the home, and that percentage is based on borrower age expected interest rate and home value up to HUD maximum claim amount ($765,000).
The Reality: Many borrowers use HECM to pay off an existing mortgage and eliminate a monthly mortgage. For example, a borrower I worked with had a home worth $7650,000 and, given their age and expected interest rate, was able to access about 50% of the equity value, $400,000. They also had an outstanding mortgage of a little more than $100,000 on the property. They opted to tap into the $400,000 equity on the reverse, and pay off the $100,000 mortgage, thereby eliminating a monthly mortgage payment.
Myth Number Three: Proceeds are considered income.
Here's a classic case of how HECM talk is like the game of telephone: we lose the real meaning because of how we think of the word "income." When a borrower receives their payout in monthly installments rather than a lump sum, we refer to those payments as "income."
The Reality: Generally, money received through a HECM is not considered income and should be tax-free, though you must continue to pay required property taxes and homeowners insurance (condo or HOA fees, if applicable). Please consult a tax professional. Also, we advise to consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
Myth Number Four: You're restricted on how you can use the proceeds.
Restrictions on how to use proceeds is another common misconception around HECMs. The fact is, you choose how to use that money. Clients have used HECM proceeds to fund healthcare services, home improvements, or as a rainy day fund for an unexpected expense, like the purchase of a car after an accident.
The Reality: You have worked hard for this asset, and prudent budgeting will allow you to enjoy proceeds received from your HECM loan. How you choose to use your funds is up to you, whether that be to supplement your retirement income, delay receiving social security benefits, pay off debt, pay for medical expenses, remodel their home, or help your adult children.
One creative way for using HECM proceeds involves a client of mine who spends her winters in Florida. She isn't ready to buy a place down there yet and uses her funds to pay rent in Florida for three months.
There are multiple ways to use HECM money, and you are not restricted.
Myth Number Five: HECMs are a product of last resort.
The air of desperation around HECMs as a last resort is usually coupled with the idea that only low-income borrowers use them. Nothing could be further from the truth. Many HECM borrowers are affluent seniors, referred by their financial advisors and estate planning attorneys, who want to create a strategic financial plan.
For example, you know now that proceeds from a HECM may not be taxable. However, your retirement account proceeds may be. Retirement accounts also carry the additional risk of market volatility, and during those times, you may want to leave your retirement account alone to recoup losses. Having a HECM available to you will allow you that freedom by serving as a source of proceeds.
The Reality: The idea that HECMs are only helpful to low-income borrowers is changing. Many affluent senior borrowers with multi-million dollar homes and healthy retirement assets are using HECMs as part of their financial plans and estate planning to enhance the overall quality and enjoyment of life in their later years.
The Myth-busting doesn’t stop here. If you’re still unsure if a HECM is right for you, let me help you consider all your options. Call me at 978-737-7489 or email me directly at for your free consultation.
About Renee Guidaboni Coleman of CrossCountry Mortgage
Ensuring that a HECM is a viable financial option for you is Renee’s priority. Initial consultations focus on eligibility and property qualification requirements, the pros and cons of HECMs, and options for receiving your money. From there, the decision to move forward is completely in the hands of the client.
In addition to working directly with borrowers and hosting education workshops about HECMs, Renee frequently consults with financial planners and estate planning attorneys who are exploring HECMs as a money management tool.