Wondering how to use your home equity as you near retirement? If you’re 62 or older, a Home Equity Conversion Mortgage (HECM) could be the key to unlocking the value you’ve built in your home. A HECM offers a flexible solution that allows you to tap into your equity and supplement retirement income without selling your house.
How Is a HECM Different from a Traditional Mortgage?
A HECM, or reverse mortgage, is a special type of home-secured loan that was first established in 1988. President Reagan created the Home Equity Conversion Mortgage when he signed the bill into law, giving the Department of Housing and Urban Development (HUD) permission to insure HECMs through the Federal Housing Administration (FHA).
Like a traditional mortgage, a HECM allows you to borrow a loan using your house as security. Also like a standard mortgage, your home’s title remains in your name when you take out a HECM loan.
But unlike a traditional mortgage:
- You don’t make monthly mortgage payments on a HECM. You’re still required to pay property tax, insurance, and any HOA dues; live in the home as your primary residence; and keep your house in good condition.
- The loan will be paid back when you stop living in your house. Interest/fees are added onto the loan’s balance every month, causing the balance to grow.
When you take out a HECM, it doesn’t mean “the bank owns your house.” Just like a standard mortgage, as long as the terms of the loan are met (such as paying property taxes and insurance and continuing maintenance), you’ll retain full ownership and may sell your house at any time.
If eligibility requirements are met, a HECM can provide cash to:
- Supplement retirement income
- Pay for extra healthcare or emergency costs
- Fund home repairs or renovations
- Pay off large sums of debt at high interest
- Plan for long-term financial goals
Interested in using a HECM to support your retirement? Find a Cornerstone loan officer near you.
There are two types of Home Equity Conversion Mortgages. The HECM program allows eligible homeowners to access home equity without monthly mortgage payments. The HECM for Purchase program can be used to purchase a new primary residence with the equity from the sale of a previous home—all without monthly mortgage payments.
What Are the Benefits of a HECM?
Are you eligible for a HECM? If so, consider these benefits at-a-glance:
- Continue to live in and keep the title to your home.
- Support your financial goals with tax-free HECM proceeds. Consult a tax advisor for specific guidance.
- Eliminate monthly mortgage payments.
- Leave remaining home equity to heirs after the HECM is paid off.
- Receive financial cushion on a limited income.
If you qualify for a HECM, you can collect the proceeds as a lump sum, monthly payments for a specified time or for as long as you live in the home, a line of credit, or a combination of these. The funds can be used any way you wish, including supplementing your income, paying for a large expense, or preparing for retirement.
HECM payouts typically aren’t considered income and won’t affect Medicare or Social Security benefits. Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
The amount you could receive depends on a handful of individual factors—like the age of the youngest borrower or eligible non-borrowing spouse, your home’s value, the amount of equity you have, FHA lending limits, the current interest rate, and the HECM product and payment option you pick.
You also don’t have to own your home outright to qualify for a HECM. If you still have a mortgage, a HECM allows you to use your home equity to pay it off—eliminating monthly mortgage payments. You can then access the remaining funds to support your retirement goals.
What Are the Drawbacks of a HECM?
A HECM may not be the right choice for everyone. There are some disadvantages to consider:
- Can’t be absent from the home for longer than 12 months
- Must maintain the home and keep up property tax, insurance, and HOA payments
- Required to complete a home inspection before the loan closes and agree to finish all recommended repairs by a certain date
- May make it difficult or impossible to will a home to relatives or children
It’s important to know that a HECM is an entirely new loan, with brand-new stipulations. A key requirement is that the home remains your primary residence. Regardless of the reason, you can’t be away from your home for more than 12 consecutive months, even if you have to go into a long-term care facility. This will result in loan termination, and all money received will need to be paid back, plus interest.
The bottom line: your home is likely to be your largest asset and can’t be ignored when planning for retirement. While there are a number of strategies for seniors, like downsizing or using a HELOC, a HECM can provide advantages that others don’t. Most retirees want to age in place for as long as possible. A HECM can allow you to tap into your equity while living in your home throughout retirement.
Is a HECM Right for You?
Today, HECMs are being used as a retirement planning tool, transforming the lives of seniors. Your local Cornerstone loan officer is available to assess your needs and provide transparent, trustworthy guidance. Reach out to discuss your options.
For educational purposes only. Sources are deemed reliable but not guaranteed.
Important HECM Details: The Home Equity Conversion Mortgage (HECM) is the only government-insured reverse mortgage loan for seniors 62+. Borrowers must live in the home as their primary residence, keep it in good condition, and stay current on property taxes, homeowners insurance, and any HOA dues. Qualification depends on the ability to meet these obligations, not traditional mortgage repayment. Seniors can access tax-free cash from their home equity through a line of credit, monthly payments, a lump sum, or a combination. The HECM is a loan, not a government benefit, and must be repaid according to program requirements. This material is not provided or approved by HUD, FHA, or any other government agency. Additional requirements and underwriting conditions apply. Speak with your loan officer for details. Consult a financial advisor for specific guidance. Not a commitment to lend. Borrower must meet qualification criteria.