As mortgage brokers, we frequently meet with clients who have dedicated many years to establishing a life and a home. They have reduced their mortgages and have built up a tremendous amount of equity in their properties, but they are struggling with cash flow issues when they go into retirement. They can be described as “house rich” but “cash poor.” For people over the age of 62, a Home Equity Conversion Mortgage, or HECM loan in SC can be a very powerful financial option.
The most common reverse mortgage is called an HECM and is insured by the Federal Housing Administration, which is a government organization otherwise known as the FHA. As much as we have seen this product change lives for the better by providing access to much-needed cash, it is important to know the HECM program pros and cons before you put your signature on a contract. Allow BrickWood Mortgage to explain everything!
The Benefits of HECM Loans
Increased Financial Flexibility
The first and most important reason for which clients come to us with a requirement for a HECM is because they want to tap into the wealth locked in their home. This facility enables you to borrow money using a part of your home equity. The money can be obtained in different ways such as a lump sum payment, a monthly payment, or a line of credit which increases with time. Such money can be a life-saver when it comes to medical bills, renovation of homes for senior living, or supplementing social security benefits for a better life.
No Monthly Mortgage Payments
One of the most appealing aspects of a reverse mortgage from a consumer perspective is the end of monthly mortgage payments. With a standard mortgage or a home equity conversion loan, you have to make payments to the mortgage company every month. With a HECM, you do not have to make payments if you occupy the residence as your principal residence. The balance will be repaid when you move out, when you die, or when you sell your residence. Naturally, you may wonder, are HECM loans a good idea? The answer depends on your financial goals, living situation, and long-term plans.
Non-Recourse Loan Protection
One thing that is always emphasized is the safety net of an FHA insurance. The HECM is a “non-recourse” loan. What this means is that you or your heirs will never have to repay more than the value of your home when repaid. Even if a market crash occurs, and you have a balance due on your mortgage higher than your home’s value, the FHA insurance will cover this deficiency.
Disadvantages of Getting an HECM Loan
Accrued Interest & Fees
Although you are not paying any monthly installments, you will be incurring interest on the money you borrow. Eventually, this will cause your balance to increase and your equity in your home to decrease. In turn, this will affect the inheritance you leave your children.
Additionally, you will incur higher closing costs and mortgage insurance premiums when using a HECM in comparison to a traditional mortgage, which makes it costly if you will not occupy your home for an extended time. For those interested in evaluating potential costs and benefits, using a HECM mortgage calculator may be helpful during your decision-making process.
Complexity and Counseling Needs
The HECM is a complicated product. To make sure borrowers know what they are getting into, all applicants must be counselled by a third-party counselor approved by HUD. While this is a protective mechanism, clients have complained to us that they do not appreciate all this red tape.
Foreclosure Risks
One factor you must keep in mind is that you will always be the owner of your residence. What this means is that you will be responsible for such expenses as payment of property taxes, homeowners insurance, and homeowners association dues. Failure to make these payments will give your lender the right to call in your loan, which can cause a potential foreclosure.
As a matter of course, before a reverse mortgage product can be recommended to our clients, we make sure they have sufficient finances to make these payments.
The Right Choice For Your Retirement
Whether or not to go through with a HECM is a personal choice that you will have to make based on your individual financial plans and circumstances. At BrickWood Mortgage, we think it is important to look at all aspects of a situation. Perhaps you are interested in eliminating payments and being able to remain in your residence permanently. An HECM might be exactly what you are looking for. Alternatively, perhaps passing a debt-free residence on to your loved ones is most important to you. In this case, another alternative may work better for you!
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This material is not from HUD or FHA and has not been approved by HUD or any government agency.