Bob Kutscbach, owner and broker of Carleton Realty, breaks down the HECM (home equity conversion mortgage) loan.
The HECM loan is a type of reverse mortgage that is a more recent development in the mortgage industry. This loan allows people of retirement age to use the equity from their sale of their more traditional home to take care of the mortgage payments in their next home.
To qualify for a HECM loan you must be 62 years old or older, be an owner-occupant, and have a significant amount of equity in the home that is selling.
A traditional reverse mortgage is where a lender would send payments each month to subsidize your income. They would slowly build up a mortgage against the home. It basically functions as a line of credit where you are borrowing money every month to give you extra income in your retirement years.
The HECM loan is where you move from your home that you have a lot of equity into a new home. In the new home, you would put down 50% so that you have a large amount of equity to start. The down payment amount depends on your age. The older you are the less you would need to put down. The reason for being at least 62 years old is that the lender wants to make sure that there will be enough equity to last for the remainder of your life.
There is a lot of misunderstanding about how this type of mortgage works. Some people think that the bank gets your home at the end of the loan. This is never how it works. Typically there is never an end to the loan unless you live to a very old age. But if the loan did come to the end, you would sell the home, pay off the loan, and keep the equity. It works the same way for your estate if you pass away, sell the home, pay off the loan, and keep the equity.
One thing that you need to keep in mind with a HECM loan is that you need enough income to pay taxes and insurance on the property. With this loan though, you would not need to qualify for the mortgage amount. You only need to qualify for taxes and insurance.
There are a few things about the HECM loan that seems unbelievable. This is an FHA insured loan, there will be some mortgage insurance added to the loan. There is no personal liability for this loan. So if the housing market goes down and the home is worth less than the mortgage, you can literally hand the keys back with no penalty to you. Also, suppose you live an exceptionally long life and you compound more interest than the mortgage. The lender can’t come back on you or your estate. Where personal liability would come in is if you did not maintain the home. If you let it fall into disrepair then you would be liable for the damage.
If you have questions about the HECM loan call us!