HECM Reverse Mortgage Products and Information
The Home Equity Conversion Mortgage (HECM) program is provided by lenders under agreement with the Department of Housing and Urban Development (HUD). The HUD established important criteria, such as eligibility, and the maximum percent of your home equity that financial institutions are able to lend. HECMs are insured by the Federal Housing Administration (FHA). They are the most common type of reverse mortgages, with approximately 95% of the reverse mortgage market.
There are two types of HECM reverse mortgages, the HECM Standard Loan, and the HECM Saver Loan. The Standard Loan and Saver Loan differ in the amounts paid upfront and the amounts you are eligible to receive. The Saver Loan offers loan amounts that are 10 – 20% less than the Standard Loan. The lower risk to the lender means that the Saver Loan comes with a significantly reduced mortgage insurance premium. This product may suit you best if you want to save on costs, and borrow against a smaller portion of your home equity, or, if you think you may leave your home within a few years. Both types of HECM loans are customizable to your individual needs. You may have a choice of a fixed rate loan for a lump sum or a variable rate for a line of credit. You can even get a HECM reverse mortgage to buy a new home!
HECM Line of Credit
A HECM reverse mortgage with a line of credit is popular due to its flexibility in how and when you receive payments. Adjustments to scheduled payments and lump payments can be made at any time if your personal circumstances change. For example you may elect to have a small monthly payment to cover your budgeted expenses, combined with the option for larger one-off withdrawals as you need them.
In comparison to a lump sum with fixed interest, a HECM line of credit allows you to lower your loan closing costs by limiting the initial payment. Furthermore, the unused portion in your line of credit grows over time. Typically, a HECM line of credit loan has a monthly adjusted interest rate based on the LIBOR index rate plus a margin. Over time, the remaining credit grows by the total amount of interest that your loan is being charged, until the remaining credit is completely drawn down. For example, if the credit line provided by the HECM reverse mortgage is $200,000 and you withdraw $50,000, then you have $150,000 remaining. If you do not withdraw any additional amounts for another 12 months, then that remaining $150,000 grows by the interest rate charged to your loan. So if that rate equalled 5% over the course of the year, then your remaining credit line will have grown an extra $7500 to $157500 over that time.
Because of the growing credit line it is not usually advisable to take a lump sum from a HECM and put it towards another investment, as your credit line will increase at a greater rate than any savings account or low-risk financial product.
HECM Fixed Rate
If you decide you want to receive all your money from a HECM reverse mortgage in one lump sum, you may have the option of a fixed interest rate. That means that when the loan closes only one interest rate applies over the lifetime of the loan. This option might be suitable if you have a large financial need at the same time you take out the loan. For example if you wanted to use a reverse mortgage to pay off the balance of your current mortgage to negate any future mortgage repayments. Or you may wish to undertake a large renovation of your home, or perhaps you have a one off medical expense you need to cover. With a lump sum payment, you are free to use any money left over after paying for your obligations, however you wish.
HECM for Purchase
You can use a HECM to purchase a new home. Rather than tapping into your existing home equity, when you buy a new home and pay a portion with your own funds, you can access that equity immediately. This means you may never have to make monthly payments on the new home. This could be a suitable choice if you prefer a home that is closer to family and services, or if you want to downsize to a property that is easier to manage.
With a HECM for purchase scheme, home equity to loan sizes are the same as for regular HECM reverse mortgages. That means you need sufficient funds for a portion of the payment for the home, which provides you with enough equity to obtain a HECM loan that provides enough funds for the remainder of the purchase cost of the home. For example, a person eligible for a HECM may buy a new home for $300,000. They could get about $170000 from the HECM and then pay the remaining $130000 plus the closing costs for the loan with their own money. If you use a HECM to purchase a home then you are required to move into the new home within 60 days of the closing of the loan.