5 Ways HECM Can Offer Financial Security in Retirement
What would peace of mind in retirement look like to you? Whether you plan to spend most of your time volunteering, working in a meaningful part-time job, or simply enjoying leisure activities to the fullest, financial security is crucial. A retirement on the horizon means answering important questions about how you’ll structure your finances to ensure a healthy, happy post-work life. One potential solution: a Home Equity Conversion Mortgage (or HECM), a type of reverse mortgage. Here we offer five reasons why it’s worth considering.
- A HECM is a government-insured reverse mortgage financing program designed for retirement.
A Home Equity Conversion Mortgage is a product created specifically for seniors aged 62-and-older to convert part of their home equity (wealth) into cash, a monthly check, or a line of credit. The HECM is designed with the over 62 population in mind, with maximum flexibility, allowing the HECM to be designed for long-term security as part of each homeowner’s specific retirement plan and financial situation. As part of the application process, seniors must participate in a consumer information session given by a HUD-approved HECM counselor to ensure that applicants understand the HECM product.
- A HECM is a mortgage that allows you to control the amount of your payouts.
One of the benefits of a HECM is that it offers borrowers an option to receive monthly checks as the monthly payout from the HECM. You can choose which type of payout makes more sense for your retirement, and that could come in the form of a tenure payout, term payout, line of credit or a combination of a monthly check and a line of credit. A regular monthly payout is an ideal way to use a HECM to supplement retirement income.
- A HECM allows you to keep an available line of credit that increases with inflation.
No one can predict the effects of inflation in the decades following retirement, but a line of credit from an adjustable rate HECM could help if inflation causes a rise in the cost of living for seniors living on a fixed income. This article in the Wall Street Journal notes that “if rates rise over the life of the loan, that will add to the growth of the credit line. Since interest rates tend to rise alongside inflation, the growing line of credit would provide an inflation hedge.”
- With a HECM, a lender cannot decrease or close your line of credit when unforeseen circumstances arise
If you’re a HECM borrower and choose to take out a line of credit as the payout option, you’ll have access to funds when you need them by submitting a written request to your mortgage lender. A reverse mortgage line of credit offers peace of mind in two ways: First, the unused portion of the line of credit is guaranteed to grow over time. And, a lender cannot decrease or close your line of credit because your income or home value declines. As long as you maintain your HECM obligations e.g., maintaining your property as a primary residence and keep property taxes, insurance and HOA dues current, your line of credit cannot be revoked.
- Taking out a HECM will not leave a financial burden for your heirs
When a HECM borrower passes away, the loan becomes due. The loan balance is based on the amount of money borrowed, the interest rates and the length of time the homeowner had the HECM. If there is equity remaining in the home, the heirs can pay the loan off with other assets, refinance the mortgage themselves or sell the home and keep any remaining proceeds. But if there is no remaining equity or the home is worth less than the HECM balance, your heirs will not owe any money when they sell the home because HECMs are considered “non-recourse” loans. As noted by the federal government’s Consumer Financial Protection Bureau, “With an FHA-insured HECM loan, if the loan balance is more than the home is worth, your heirs don’t have to pay the excess. After your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.”
If you’re interested in learning more about a Home Equity Conversion Mortgage or HECM, and how it might benefit your life in retirement, contact Open Mortgage today.
Things to know about Reverse Mortgages:
- At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds
- Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees
- The loan balance grows over time and interest is charged on the outstanding balance
- The borrower remains responsible for property taxes, hazard insurance and home maintenance, and failure to pay these amounts may result in the loss of the home
- Interest on a reverse mortgage is not tax-deductible until the borrower makes partial or full re-payment