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What is a HECM Reverse Mortgage loan?

 

Have you heard of a HECM loan? If not, let me share with you what it is and clarify if it is something you should consider. First of all, HECM which is pronounced “Heck-Em” stands for Home Equity Conversion Mortgage. You may not recognize the term HECM but I am willing to bet you have heard of a Reverse Mortgage right? A HECM is the most common type of Reverse Mortgage and is generally one in the same.  HECMs have been around since 1988 and have had many changes and improvements to the program over the last 33 years. But most importantly, the program has been revamped, making them safer and better today.

Yes, I know, for some seniors the concept of a reverse mortgage has negative connotations. But, let me assure you, there are a LOT of misunderstandings and flat out lies about reverse mortgages from people who really do not understand them. Over the next few months, I will be sharing fact-based information on what a reverse mortgage is, how a reverse mortgage works, the costs, the benefits, the misconceptions, the pros and cons, different ways to utilize a reverse mortgage, how it could benefit you or someone you know and much more.

So here we go…

Home equity is often an ignored asset in retirement and in many cases, it could be your largest asset, especially for seniors. In fact, there is currently over $11 billion of home equity among seniors in our country today. So here is the challenge…we work very hard to purchase a home and we pay a lot of money over the years maintaining the home, making mortgage payments, and working to pay down the mortgage or to even pay off the mortgage. In fact, people celebrate not having a mortgage anymore. This was a great financial strategy maybe 10, 20 or even 30 years ago but have you ever asked why this was the goal and if that should still be your goal today?

I ask you to think of this, why do we want more home equity? Isn’t more cash what we really want? Home equity is not liquid money and equity cannot be used like cash to purchase needed items. You cannot remove your front door or your chandelier and use it to purchase groceries, gas or medications or to go on a vacation with your family. You see, we all want to accumulate equity and yet equity is not a usable asset in retirement.  That is where the Home Equity Conversion Mortgage (HECM) comes into play. A HECM is a tool that allows a homeowner aged 62 or older to access a portion of their home equity and convert it to cash without having to sell their home or make a monthly mortgage payment (you are always required to pay the property taxes and home insurance).

A HECM is a way to turn a portion of the equity in your home into usable cash (free of income taxes*). So far, doesn’t that sound intriguing? The proceeds from a reverse mortgage can be used for anything, to include but not limited to, paying for unexpected expenses, such as home improvement, nursing home costs or long-term care. It could also provide you with additional cash flow for all your ongoing monthly expenses. As long as all the loan terms are met, the loan does not require repayment until the last surviving borrower permanently moves out of the home, sells the home or passes away. The reverse mortgage allows you to access equity through a lump sum, a monthly payment plan or a line of credit (or a combination). I will write more in the upcoming weeks on how each strategy works with some examples.

Here is an example of a client I helped recently and how she used a reverse mortgage to help her: she previously had a monthly mortgage payment and was quickly spending down her retirement savings. Her financial adviser showed her that based on her income and expenses she will likely run out of money by her early-80s if she did not make some adjustments to her income or expenses. After factoring in the reverse mortgage loan, and eliminating her mortgage payment, her retirement funds will now last her into her mid-90s, and she even has additional cash available from the reverse mortgage to complete needed updates to her home.

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