HECM Vs Reverse Mortgages: What Seniors Need to Know

Retirement is supposed to be stress-free and a time to get your well-earned enjoyment but financial troubles can make even retirement a challenge for you. What if your home could solve these problems for you? 

Want to know how you can make it happen? You can do it by understanding the difference between HECM and reverse mortgages. Many elderly folks can't differentiate between them and gamble with their financial future. 

This guide breaks everything down for you so it's easier to make an informed decision. 

Quick Definitions: HECM and Reverse Mortgage Simplified

Let's start simply by learning what these mortgages are.

What is a Reverse Mortgage?

Reverse mortgages are for older homeowner aged 62 or above who want to borrow money based on the equity in their house. You don’t have to sell your house, and your lender will pay you monthly payments based on your equity.

Although you still need to pay taxes or insurance on the property. You still have to maintain the property standard.

Qualifications

There are different requirements, but for most common reverse mortgages, you must;

• Be 62 or older
• Live in the property on which you want to take out a loan
• Have enough funds to maintain your property, such as paying taxes, insurance, repair, and home association fees.
• Have paid off a significant amount of your mortgage.
• Be approved by a lender.
• Have a counseling session with an approved Department of Housing and Urban Development (HUD) counselor.
• Not have any unpaid taxes or federal debt.

Repayment of the Reverse mortgage

There are different ways it can be paid back;

• The borrower moves out.
• The borrower sells the house.
• The borrower passes away.

What is a Home Equity Conversion Mortgage (HECM)?

Home Equity Conversion Mortgages are the most common type of reverse mortgage. These reverse mortgages are the only ones that are insured by the Federal Housing Authority (FDA), and you can only get HECM through an FHA-approved lender.

The Key Differences: HECM vs Reverse Mortgages

Let's examine the key differences between HECM vs proprietary reverse mortgage and single-purpose reverse mortgage.

In-Depth: Home Equity Conversion Mortgage (HECM)

What sets it apart?

By enabling homeowners to receive payments from the lender, HECM switches the roles of standard mortgages.

The goal is to give retirees financial security and flexibility so they may continue to live well and pay their bills without having to liquidate their houses.

FHA Insured Mortgage

This insurance protects both borrowers and lenders. Even if the lender goes out of business or the loan balance exceeds the home's value, it ensures that borrowers won't have to vacate their homes. Lenders who offer reverse mortgages are less risky since FHA insurance guarantees repayment.

Eligibility

The eligibility requirement is the same as other reverse mortgages.

• Be 62 or older.
• Own your own house and live in it as your primary residence
• Own the house or at least have significant equity in it.
• Meet the credit and income requirements.
• Attend a HUD-approved counseling session.

HECM property requirements

Here are the properties eligible for a HECM.

• Single-family homes
• 2 to 4 unit properties
• Modular homes
• Manufactured homes that meet FDA requirements
• Townhouses
• FDA-approved condominium projects
• Planned unit developments

Costs:

Following are the costs associated with HECM.

• Upfront Mortgage Insurance Premium (UFMIP): All HECM loans must include the Upfront Mortgage Insurance Premium (UFMIP), which is usually set at 2% of the home's value (or HUD's maximum lending limit). At closure, it is paid.
• Origination Fee: This FHA-capped fee is assessed by lenders to process the loan. It may reach $6,000, based on the value of the house.
• Closing expenses: These could include third-party services like flood certification and settlement closing, as well as different costs, including document preparation, appraisal, credit report, and title insurance.
• The annual premium for mortgage insurance (MIP): An ongoing charge that persists for the duration of the loan and is determined by the remaining loan balance
• Fees for Counseling: Borrowers are required to complete counseling before qualifying for a HECM loan.

Reverse Mortgage Alternatives: Comparing Options

Proprietary Reverse Mortgages

Suppose you are someone with high-value property and wish to access more equity than what is permitted under the federally insured reverse mortgages. Such as HECM, then you can do so with a proprietary reverse mortgage. These are private loans that the federal government does not cover.

Features

Following are some of the features of Proprietary reverse mortgages.

• Tend to be used when the home value surpasses the HECM loan restrictions.
• Large loan amounts for high-value properties.
• Higher fees and interest rates.
• More costly
• Less consumer friendly
• Flexibility in how the money is utilized
• Fewer restrictions
• Limited protections

Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages, as its name implies, are just intended for the particular purpose it was designed for, such as covering property taxes or doing house maintenance. 

If you are someone on a fixed income and need assistance paying for necessities but donw want to take out a larger loan? This is the right choice for you. These loans are particularly a great choice. 

Features

Some of the features of single-purpose reverse mortgages.

• Reduced fees and interest rates.
• Usually provided by non-profits or local and state governments.
• Money can only be used for specific purposes.
• Loan amounts are smaller than other mortgages.
• Less flexible than proprietary reverse mortgages.

Who Benefits Most from HECM vs. Reverse Mortgage?

Let's look at a couple of scenarios to understand HECM vs proprietary reverse mortgage better.

Scenario #1

Mary, 67, wants a steady income while living in her house for more than 40 years. She has no intention of selling or moving. She wants to avoid taking on more monthly payments, but she needs a steady income to pay for her living expenses in retirement.

Solution

HECM (Home Equity Conversion Mortgage) is the best choice.

The main reason Mary would profit from HECM is that it would enable her to remain in her house while using the equity in her home to receive lump sum payments, monthly payments, or a mix of the two. With this option, there is no need for monthly mortgage payments, and the money can be utilized however she can see fit.  This is why, for seniors who need additional income while still owning their house, the HECM is perfect.​

Scenario #2

Empty-nesters John and Susan need money to downsize: After their kids have left home, John and Susan want to move into a smaller, easier-to-manage house, but they need a little additional cash to help with the relocation and to add to their retirement funds.

Solution

Proprietary Reverse Mortgage is the best choice.

A Proprietary Reverse Mortgage might be advantageous for John and Susan, particularly if the value of their house exceeds the HECM's limitations. They would have more access to the equity in their home and be free to spend the money any way they saw fit. A bespoke reverse mortgage enables a more significant loan amount for higher-value residences, which is helpful for relocation expenses, retirement savings, and buying a new home.

Pros and Cons of HECM

As with any other mortgage type, HECM has its own set of pros and cons.

Pros

• HECMs are insured by the Federal Housing Authority protecting both the lender and the borrower.
• You can convert your home equity into cash, a line of credit, or fixed monthly advances.
• You don’t have to make monthly mortgage payments as long as you fulfill the loan terms.
• Flexibility in how the funds can be used.

Cons

• The unpaid loan balance grows over time, including the interest and fees.
• You are taking from your home equity which means your heirs would have less or no money coming out of that asset for them.
• HECMs have high upfront costs.

Financial Tips to Minimize the Cons

Here are a few tips you can use to counter the cons.

• Shop around for lenders who offer lower fees and interest rates.
• Avoid withdrawing more significant amounts from your home equity and only for necessities.
• Check whether the reverse mortgage supports voluntary payments to lower the loan balance if you wish to leave more equity for your heirs.
• With an emphasis on necessities, use the loan to supplement other retirement funds.

Myths and Misunderstandings About HECMs and Reverse Mortgages

Let's debunk some of the myths. 

1. “You lose ownership of your house.”

As long as you fulfill your loan commitments, including paying the property taxes and managing the property, you keep the title of the house.

2. “Reverse mortgages are only for the desperate.”

In actuality, reverse mortgages can be helpful instruments for financial planning since they offer liquidity without requiring the sale of the house.

Checklist: Is HECM or Reverse Mortgage Right for You?

Consider the following:

• Do you want a consistent stream of income, or do you want a substantial one-time payout?
• Does your house fit the property requirements for HECM or other reverse mortgages?
• Are you interested in broader borrowing limits or a federally insured loan?
• For HECMs, HUD counseling is required, are you up for that?

Pro Tip: To make sure your long-term financial plans align with reverse mortgage terms, review them with a reliable advisor.

If you want to safeguard your financial future, reach out to us now!

FAQ:

How much can I borrow with an HECM?

The current loan limit set on HECM by the Federal Housing Finance Agency is $1,149,825.

Why type of reverse mortgage is the cheapest?

Although they are the least expensive, single-purpose reverse mortgages are only available for specific uses and might not be accessible in all locations. 

Conclusion

To sum up, knowing the distinctions between reverse mortgages vs HECM for purchase is essential for making wise choices. Your choice may significantly impact your financial security. Take the first step toward safeguarding your financial future by getting in touch with Truss Financial Group right now to arrange a free financial analysis and receive individualized advice.