HECM stands for Home Equity Conversion Mortgage. It’s the acronym used to describe the federal government insured reverse mortgage program, which is only available to homeowners over age 62.
Today’s HECM mortgages are insured by FHA, regulated by HUD, and they were passed into law by Congress. Contrary to what you may have heard, there is absolutely nothing wrong with today’s HECM mortgages.
HECMs are among the most heavily regulated mortgages in the country, they require a HUD counseling session even before an application can be submitted… and they are truly unique. There’s not another mortgage anywhere in the country that can do what the HECM can do as safely as the HECM does it.
HECMs are often referred to as reverse mortgages, but that term shouldn’t scare anyone. “Reverse mortgage” is a generic term from decades ago, so while a HECM can be considered a reverse mortgage, not all reverse mortgages are HECMs.
Here’s what it says in the U.S. Code about the purpose of the HECM program… word for word.
12 U.S.C. 1715Z-20 – HOME EQUITY CONVERSION MORTGAGES FOR ELDERLY HOMEOWNERS
(a) Purpose
(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of Home Equity Conversion Mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and
(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of Home Equity Conversion Mortgages for elderly homeowners.
It should be simple to understand… as we get older our incomes tend to go down and our expenses tend to go up. So, the HECM program was put in place to help homeowners make their retirement years more secure. What could possibly be considered wrong with that?
The HECM is Truly Unique…
People often use the term “unique” to describe things that aren’t actually unique. But the HECM is actually unique. There’s only one HECM program and nothing else can do what a HECM mortgage does.
One of the things that makes HECM mortgages unique is that the borrowers never have to make monthly payments on the loan. You can make payments anytime you want to in any amount and as often as you want to… and you do have to pay your own property taxes and insurance, but you never HAVE to make a mortgage payment… ever.
When the homeowners die, the home is left to their heirs and those heirs can either refinance the HECM and keep the home, or they can choose to sell the home and keep the equity, but either way that’s when the HECM loan is repaid.
Think about that for a moment. If you switched your current mortgage to a HECM, you could decide if and when you make whatever payments you choose to make… but you never have to make a payment on your HECM mortgage.
So, the HECM allows people over the age of 62 to borrow against the equity in their homes, with no obligation to repay the mortgage as long as they occupy the house as their primary residence. If no payments are made, or if the payments made weren’t enough to cover the interest, that interest is repaid after the borrower dies or sells the home.
Here’s an example of how the interest works… if your HECM balance was $100,000 and you didn’t make a payment all year… and the interest rate was 4%, then at the end of the year your balance would have increased to $104,000. You can choose to either pay the interest or you can let it accrue and not pay it until you sell the home or die.
The Impact Can Be Dramatic… and Tax-free.
Let’s say you have a mortgage payment of $2,000 a month and you switch it to a HECM.
Well, first of all by doing so you wouldn’t have to make that monthly payment anymore so you could put an additional $24,000 a year into your own bank account instead of paying it to your bank. Over five years, that could mean adding an additional $150,000 to your retirement nest egg.
In addition, the funds you get from a HECM are tax-free. If you’re withdrawing money from an IRA or 401(k) the money is taxable as ordinary income. So, depending on your situation it can be a big advantage to use tax-free money instead of having to pay the taxes on funds from a qualified retirement plan.
And that’s just the beginning of what you can do with a HECM…
HECMs also offer a line of credit program, similar to a Home Equity Line of Credit or HELOC… but better.
One advantage is that the HECM Line of Credit is guaranteed to increase every year by whatever the interest rate is, plus half a point. So, if your HECM interest rate was 3.5%, then your HECM Line of Credit would increase by 4% a year… whether your home’s value went up or not. And the HECM Line of Credit can never be cancelled, like a HELOC can, so you can tap it whenever you need to.
And qualifying for a HECM is much easier than is the case for other mortgage products. You have to be over age 62 and own a home with roughly 50% equity… a little less if you’re older and a little more if younger. (You can learn more about qualifying for a HECM here.
The HECM also offers a special program designed for home BUYERS that’s especially powerful when you’re selling a home in order to downsize into something smaller. It’s called HECM for Purchase.
Consider this example…
Let’s say your home is worth $700,000 and after selling it you walked away with $650,000. You find a home for $400,000 that you like, but instead of needing to use $400,000 to buy it, you use a HECM for Purchase mortgage.
That means that you can buy that $400,000 home with roughly $200,000 down… and never have to make a monthly payment if you don’t want to.
It also means that you can put the $450,000 remaining from the sale of your home into your own bank account to make your retirement years that much better… and safer, financially speaking. And don’t kid yourself about retirement… you don’t know how long it will last so you should try to hold onto as much of your cash as you can for as long as you can.
The overriding point is that there’s absolutely nothing wrong with the HECM program. Congress passed it into law, HUD regulates it and it’s FHA insured. HECM mortgages do what they promise to do every single time.
If you can utilize a HECM for whatever reason, you’ll find it literally unique. Nothing else will do what the HECM products will do. And they’ll do it every single time.
What is “controversial” about that?
In terms of details, there are a handful of others you need to know… like it has to be your primary residence, although it will cover up to a four-plex, and you’re still responsible for paying your property taxes and insurance. But because there are any number of ways that a HECM can be structured and used, one person’s reason for using one is likely very different than would be another’s.
So, if there’s nothing wrong with HECM mortgages, why do some people think there is?
Well, a few key factors have helped to make the HECM program widely misunderstood. Some journalists simply don’t know what they’re talking about. And how the media covers HECMs is a big part of them being poorly understood. How people have been taken advantage of in the past is another… but neither has anything to do with today’s HECMs.
It’s absolutely tragic how poorly understood today’s HECM program is today, even though its reputation has significantly improved over the last few years. There is still a long way to go before the situation will change in a meaningful way, and that’s a real loss for countless Americans as they approach or are in their retirement years.
Does the bank ever own your home?
No. No. No. Never. I do realize that many people think that using a reverse mortgage means that the bank will own their home… but it’s simply not true. Having a HECM does not mean that the bank owns your home. Just like when you have any other kind of mortgage… you own the home… not the bank.
The bottom-line is that everyone approaching or in retirement should know about the HECM program and how it might impact their retirement years. There’s absolutely nothing wrong with today’s HECM mortgages and there’s nothing like a HECM, so if you haven’t looked into it… you should.
Retirement has changed…
Retirement today is not what it was for past generations. Today, it’s measured in decades, not years, and no one can know what will happen over decades. The HECM may be the most powerful tool you’re not using to make your retirement years more secure.
Today, there are roughly 10 million homeowners over age 62 that still have mortgages… and few can retire safely with a mortgage payment. As long as you’re working, you can still make the payment, but if anything changes, it can quickly become a real problem.
A HECM can protect you from having to sell your home before you want to because it can provide you with a cushion of tax-free money that you don’t have to repay until you sell your home or die.
Stay tuned for more on the subject because this is too important a subject to ignore.
Mandelman out.
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