Busting the Myths of a Home Equity Conversion Mortgage
A type of reverse mortgage, an HECM can be the best loan for you in certain circumstances.
Whether you’re sitting down to dinner at a restaurant or considering a home loan, it’s good to have choices. Fortunately for potential homebuyers and current homeowners, there are many types of mortgage products available to them, each designed to cater to a specific purchasing or refinancing need.
Not all of them are ideal for every borrower, but a product that is well-suited for your situation could help you achieve your financial goals better than others. One of these products is a Home Equity Conversion Mortgage (HECM), a type of reverse mortgage insured by the Federal Housing Administration (FHA).
Investopedia.com describes an HECM as a loan that allows seniors age 62 or older to convert the equity in their home to cash. The money is advanced against the value of the equity and interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) pass away. In either scenario, the loan must then be repaid entirely. Think of it as a home equity loan without the regular monthly payments.
Next to an Adjustable Rate Mortgage (ARM), an HECM is probably the home loan product that has the most misconceptions associated with it. Let’s lay out some of the biggest HECM myths, each followed by a dose of reality.
MYTH NO. 1: The lender owns your home.
REALITY: You will retain the title and ownership of the home during the life of the loan, and you can sell your home at any time. The loan will not become due as long as you continue to meet basic loan obligations that include living in the home, maintaining the home according to FHA requirements, and paying property taxes and homeowners insurance.
MYTH NO. 2: Your home must be free and clear of any existing mortgages.
REALITY: Many borrowers use an HECM to pay off an existing mortgage and eliminate monthly mortgage payments, provided they meet the same basic loan obligations listed above.
MYTH NO. 3: Once loan proceeds are received, you pay taxes on them.
REALITY: HECM proceeds are tax-free, as they are not considered income. However, we recommend that you consult your financial advisor, tax preparer and appropriate government agencies for more exact information about any implications related to taxes or government benefits.
MYTH NO. 4: You are restricted on how to use the loan proceeds.
REALITY: Once any existing mortgage or lien on your home has been paid off, the net loan proceeds from your HECM can be used for any reason. Many borrowers use them to supplement their retirement income, delay receiving social security benefits, pay off debt, pay for medical expenses, remodel their home, or help their adult children. You have worked hard for this asset. With prudence and smart budgeting, you can feel confident about using the proceeds from your HECM however you wish.
MYTH NO. 5: Only low-income borrowers need HECMs.
REALITY: The perception of the HECM as an assist for those with low income is changing. Many affluent senior borrowers with multimillion-dollar homes and healthy retirement assets are using HECMs as part of their financial and estate planning. They are doing so in conjunction with financial professionals and estate attorneys to enhance their overall quality and enjoyment of life.
Your licensed CrossCountry Mortgage loan officer is also available to answer your questions about HECMs and advise you about home loan options that make the most sense for you in your older years. Your best interests and financial success will always be our top priority. Start the conversation today!
This material is not provided by, nor was it approved by the Department of Housing & Urban Development (HUD) or by the Federal Housing Administration (FHA). W-061113-D.
All loans subject to underwriting approval. Certain restrictions apply. Call for details. CrossCountry Mortgage, LLC is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government. To obtain an HECM, you must take the approved HUD approved counseling available at little to no cost and receive a certificate of completion that will be required during the application process. While you won’t make any mortgage payments, you will still be responsible for property taxes and homeowners insurance and upkeep of the property.