When it comes to personal finance, there are a lot of different options to choose from. One important decision that you will have to make is whether to get a HECM or reverse mortgage. Both of these options offer unique advantages and disadvantages, so it can be difficult to decide which one is right for you.
In this article, we will compare and contrast HECM Vs Reverse Mortgage, so that you can make an informed decision about your finances!
HECM Vs Reverse Mortgage Table of Contents
What is an HECM?
A Home Equity Conversion Mortgage (HECM) is a reverse mortgage loan that allows homeowners 62 years of age or older to cash in on the equity built up in their homes.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners to borrow against the equity in their home. The loan does not have to be repaid until the borrower dies, sells the home, or permanently moves out of the home.
Reverse mortgages can be a great way for seniors to tap into the equity in their home without having to make monthly loan payments.
What is The Difference Between an HECM and a Reverse Mortgage?
When it comes to deciding whether to choose an HECM or a Reverse Mortgage, it is important to understand the difference between the two products. Both options have their own set of advantages and disadvantages that need to be considered before making a decision.
An HECM, or Home Equity Conversion Mortgage, is a type of mortgage that is insured by the Federal Housing Administration (FHA). This type of mortgage allows homeowners to convert a portion of their home equity into cash. The amount of cash that can be borrowed is based on the value of the home, the age of the borrower, and the interest rate.
A Reverse Mortgage, on the other hand, is a loan that is used to pay off an existing mortgage. The loan is repaid when the borrower sells the home or dies. The amount of cash that can be borrowed is based on the value of the home, the age of the borrower, and the interest rate.
What Are The Different Types of HECM?
The most common type of HECM is the Standard HECM, which allows you to borrow a fixed amount against your home equity. The other option is the Saver HECM, which has a lower upfront cost but limits how much you can borrow.
What Are The Different Types of Reverse Mortgage?
There are three different types of reverse mortgage:
Home Equity Conversion Mortgage (HECM)
This is the most common type of reverse mortgage. It’s insured by the Federal Housing Administration (FHA) and available through most lenders.
Single-Purpose Reverse Mortgage
As the name suggests, this type of reverse mortgage can only be used for a specific purpose, such as making home improvements or paying for medical care.
Proprietary Reverse Mortgage
A proprietary reverse mortgage is a private loan that’s not insured by the government. They’re usually available through certain lenders and have higher borrowing limits than HECMs.
What Are The Advantages of an HECM?
There are several advantages that come with an HECM. One of the biggest is that you don’t have to make any monthly payments on the loan. The interest and principal are both paid off when the house is sold, so there’s no need to worry about making sure you have the money each month to cover your payments.
Another advantage is that you can use the equity in your home to supplement your income in retirement. This can be a great way to make sure you have the money you need to cover all of your expenses, without having to worry about outliving your savings.
Finally, an HECM can give you peace of mind by providing you with a line of credit that you can tap into if you ever need it. This line of credit grows over time, so it’s there when you need it, without having to worry about applying for and being approved for a new loan.
What Are The Advantages of a Reverse Mortgage?
A reverse mortgage can be a great way to supplement your retirement income, or even serve as your primary source of income. There are several advantages to taking out a reverse mortgage, including:
- You can stay in your home as long as you like. There are no monthly mortgage payments to make, so you can live in your home for as long as you want.
- You can access the equity in your home without having to sell it. With a traditional mortgage, you would have to sell your home to access the equity. With a reverse mortgage, you can access the equity without having to sell your home.
- You can use the money from a reverse mortgage for any purpose. There are no restrictions on how you can use the money from a reverse mortgage. You can use it to supplement your retirement income, pay for healthcare expenses, or even make home improvements.
What Are The Disadvantages of HECM?
There are a few disadvantages of HECM that you should know before deciding if this is the right option for you.
One downside is that you may have to pay mortgage insurance, which can add to the overall cost of your loan.
Additionally, the interest rate on your HECM loan may be higher than the current market rate, so you'll want to be sure to compare rates before deciding.
Finally, HECM loans are not available for investment properties, so if you're looking to use your home equity to purchase an investment property, this may not be the right option for you.
What Are The Disadvantages of Reverse Mortgage?
Reverse mortgage can be a very expensive way to borrow money. The fees charged by the lenders are often much higher than traditional mortgages, and the interest rates can be quite high as well. In addition, reverse mortgage typically requires that the borrower make monthly payments towards the loan balance, which can further add to the overall cost of borrowing.
Another potential disadvantage of reverse mortgage is that it can reduce the equity in your home. If you have a significant amount of equity built up in your property, taking out a reverse mortgage can eat away at this equity. This can leave you with less money to use for other purposes, such as funding retirement or making home improvements.
Finally, it's important to note that reverse mortgage are not right for everyone. If you're not sure whether this type of loan is right for you, be sure to speak with a financial advisor to get more information.
So, Which One Should You Use?
The answer to this question is going to be different for everyone. It really depends on your personal financial situation and what you hope to accomplish by taking out a reverse mortgage.
If you're simply looking for some extra cash to supplement your retirement income, then a HECM may be the better option. On the other hand, if you're hoping to use your reverse mortgage as a way to stay in your home for as long as possible, then a proprietary reverse mortgage may be the better choice.
What Are Some Alternatives to Using an HECM or a Reverse Mortgage?
There are a few alternatives to using an HECM or a Reverse Mortgage. You could take out a home equity loan, get a HELOC, or sell your home and downsize.
A home equity loan is when you borrow money against the value of your home. The interest rates are usually lower than with other types of loans, and you may be able to get a tax deduction for the interest you pay.
A HELOC is a home equity line of credit. You can borrow against the value of your home, up to a certain limit, and pay it back over time. The interest rates are usually variable, so they could go up or down.
Selling your home and downsizing is another option. This could give you a lump sum of cash that you could use to pay off debt, invest, or just keep in the bank. You would need to find a new place to live, which might be smaller and less expensive than your current home.
What Are Some Tips For Using an HECM?
If you're considering taking out an HECM, there are a few things to keep in mind. First, make sure you understand all the terms and conditions of the loan. Be sure to ask questions if anything is unclear. It's also important to shop around and compare different lenders before making a decision.
Once you've chosen a lender, be sure to ask about all the fees associated with the loan. These can add up, so it's important to know what you're getting into before signing on the dotted line.
Last but not least, make sure you have a clear plan for how you'll use the money from your HECM. Will you use it to pay off debt? Make home improvements? Cover everyday expenses? Knowing how you'll use the money will help you make the best decision for your financial situation.
What Are Some Tips For Using a Reverse Mortgage?
If you're considering a reverse mortgage, there are a few things to keep in mind.
First and foremost, make sure that you understand all of the terms and conditions associated with the loan. There are typically fees involved, so it's important to know what those are and whether or not you can afford them
Second, remember that a reverse mortgage is a loan, and like any other loan, it needs to be repaid. That means you'll need to have a plan in place for how you'll make those payments.
Finally, keep in mind that a reverse mortgage may not be the right choice for everyone. It's important to consult with a financial advisor to see if this type of loan is right for you.