Gabe Bodner
A HECM is a Home Equity Conversion Mortgage which is most commonly referred to as a Reverse Mortgage. In one sentence, a HECM/Reverse Mortgage is a home equity loan that does not require traditional monthly payments. A homeowner 62 years of age or over, that has considerable home equity, can borrow against the value of their home and receive funds as a lump sum, a fixed monthly payment or a line of credit. But unlike any other loan, you do not have to make any monthly payments (you always need to pay property taxes, home insurance and HOA dues).
Let’s break down how a reverse mortgage works. First, a reverse mortgage must be the only loan against the title of your home. Which means, if you have a mortgage or a HELOC (Home Equity Line of Credit), the first thing we must do is payoff all mortgages. We can do this by using funds from the reverse mortgage so you do not usually need to come up with any cash. This ensures that the reverse mortgage is in 1st lien position. If you do not have a mortgage or a HELOC and you own your home free and clear of any liens, this does not apply.
Are you wondering how you would get equity out of your home? A HECM has three different ways to receive cash from the equity in your home. You can choose any one of the options or you can use a combination of the three different ways to help achieve your needs or goals.
Option One is called a lump sum. The lump sum can be used to take cash out for any reason. Some of my clients have used it to: pay off debt, home remodeling, needed home improvements, gifting, travel or to cover medical expenses but the uses are unlimited. You can even use it to purchase another home!
Option Two is a Line of Credit (LOC). This is certainly the most powerful, and flexible way to get equity out of your home. The reverse mortgage LOC is similar to a traditional HELOC but is a much more efficient and safer strategy for older homeowners. One of the main reasons is because the reverse mortgage is a non-recourse loan which means you can never owe more than the value of the home itself, ever. The other reason is because the unused funds in this LOC are guaranteed to grow regardless of the economy, interest rates, or the future value of your home. The LOC actually grows by the interest rate itself. On top of all of this, the funds are guaranteed to be accessible to you (as long as you continue to live in the home, pay your property taxes, home insurance and HOA dues). This is not the case with a HELOC because the funds can be frozen and inaccessible in many cases, like if home values drop. Lastly, when you take money out of the LOC, you are not required to pay the money back monthly, unlike a HELOC which requires payments monthly and your payment can increase if interest rates increase. For all these reasons and more, the reverse LOC is again one of the most powerful methods and uses of the HECM.
Option Three is to receive monthly disbursements. Depending on your age, current interest rates and the value of your home, the HECM reverse mortgage loan will allow you to RECEIVE monthly disbursements. These disbursements can be set up for a period of time like 5, 7 or 10 years (this is called a term payment plan). Or you can set up monthly disbursements for life (this is called a tenure payment plan). For example, you may be able to receive $1,500 per month for the rest of your life, $2,000 a month for the next twelve years, or $3,000 per month for the next five years. In many cases you can get both a LOC and receive monthly disbursements. Each situation is different and will vary depending on your home value, your age, and current interest rates. Overall, this is a great strategy to replace lost income due to retirement, divorce, or the passing of a spouse.
*Note: With a HECM you must continue to pay the property taxes, home insurance and HOA dues if required.
Gabe Bodner is a Retirement Mortgage Planner in Boulder. Gabe utilizes the latest research from the top researchers to assist his clients to Live for Today and Plan for Tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.
