Making the decision between a HECM and reverse mortgage can be difficult. Both options offer unique benefits, but it's important to understand the differences before you make a choice.
In this guide, we will compare and contrast these two types of mortgages, so that you can make an informed decision about which is right for you.
HECM Vs Reverse Mortgages Table of Contents
What is an HECM?
A Home Equity Conversion Mortgage (HECM) is a government-insured reverse mortgage program. It's designed to help eligible seniors convert the equity in their homes into cash, which can be used for any purpose.
What is a Reverse Mortgage?
A reverse mortgage is a loan that allows homeowners 62 years or older to convert a portion of their home equity into cash. The equity you built up in your home over the years is used as collateral for the loan, which can be paid out in lump sum, monthly payments, or line of credit.
What is The Difference Between HECM and a Reverse Mortgage?
The main difference between HECM and a Reverse Mortgage is that with HECM, you are required to pay back the loan when you move or sell the home. With a Reverse Mortgage, there is no such requirement- the loan is only due when you die or permanently move out of the home.
What Are The Different Types of HECM?
There are three different types of HECM: the Standard HECM, the Saver HECM, and the Reverse for Purchase.
Standard Home Equity Conversion Mortgage
The Standard Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage. With this type of loan, you can borrow up to 80% of your home’s appraised value. The loan amount is based on your age, the equity in your home, and the prevailing interest rates.
Saver Home Equity Conversion Mortgage
The Saver Home Equity Conversion Mortgage (HECM) is a newer type of loan that was introduced in 2009. With this type of loan, you can only borrow up to 60% of your home’s appraised value. The loan amount is based on your age, the equity in your home, and the prevailing interest rates.
Reverse for Purchase Home Equity Conversion Mortgage
The Reverse for Purchase Home Equity Conversion Mortgage (HECM) is a special type of loan that allows you to purchase a new home with the proceeds from the loan. With this type of loan, you can borrow up to 80% of your home’s appraised value. The loan amount is based on your age, the equity in your home, and the prevailing interest rates.
What Are The Different Types of Reverse Mortgage?
There are three different types of reverse mortgage: government-insured, proprietary, and single-purpose.
Government-Insured Reverse Mortgage
Also known as a Home Equity Conversion Mortgage (HECM), this is the most popular type of reverse mortgage. It’s insured by the Federal Housing Administration (FHA) and is available through FHA-approved lenders.
Proprietary Reverse Mortgage
These loans are offered by private companies and allow for larger loan amounts than the government-insured HECMs. They also usually don’t require as many restrictions, such as being used for a primary residence only.
Single-Purpose Reverse Mortgage
As the name suggests, these loans are meant to be used for a specific purpose approved by the lender, such as making home repairs or paying property taxes. They tend to have stricter requirements, such as income and credit score minimums.
What Are The Advantages of HECM?
There are several advantages of HECM that make it an attractive option for seniors. One of the biggest advantages is that you will not have to make any monthly payments on the loan. The loan is repaid when the house is sold, so there is no burden on the borrower to make monthly payments.
Another advantage of HECM is that it can be used to purchase a new home. This can be a great option for seniors who want to downsize or move to a different location. With a HECM, you can use the equity in your home to buy a new home outright, without having to get a mortgage or take out a loan.
Finally, HECM can give you peace of mind in retirement. Since the loan is not due until the house is sold, you will not have to worry about making monthly payments. This can allow you to relax and enjoy your retirement without stress.
What Are The Advantages of a Reverse Mortgage?
There are a few advantages of reverse mortgages that make them an attractive option for some homeowners. One advantage is that you don't have to make any monthly payments on the loan. The interest and fees are simply added to the balance of the loan, which is only repaid when you sell your home or pass away.
Another advantage is that you can use the equity in your home to supplement your retirement income. This can be a great way to maintain your standard of living in retirement without having to worry about making monthly loan payments.
Finally, reverse mortgages can be a good way to free up some cash if you are struggling financially. If you are facing foreclosure or are otherwise in danger of losing your home, a reverse mortgage can give you the money you need to stay afloat.
What Are The Disadvantages of HECM?
There are a few disadvantages of HECM that are worth mentioning. First, the fees associated with this type of loan can be quite high.
In addition, if you do not make your payments on time, the interest rate on your loan can increase significantly. Lastly, if you pass away before the loan is paid off, your heirs may be responsible for repaying the remaining balance.
What Are The Disadvantages of Reverse Mortgage?
Reverse Mortgage is not a "free money" program. Borrowers are still responsible for paying property taxes, insurance, and maintaining the home. If the borrower does not pay these items, the loan will become delinquent and could lead to foreclosure.
Another disadvantage of a Reverse Mortgage is that it may limit the inheritance you can leave to your heirs. The loan must be repaid when the last surviving borrower dies or permanently moves out of the home. If the home is sold for less than the amount owed on the loan, your heirs may be responsible for paying the difference.
Lastly, a Reverse Mortgage can be more expensive than a traditional mortgage. Origination fees, appraisal fees, and closing costs are typically higher with a Reverse Mortgage. Additionally, interest accrues on the loan balance at a higher rate than a traditional mortgage.
So, Which One Should You Use?
The answer to that question depends on your individual situation. If you're looking for a way to supplement your income in retirement, then a HECM could be the right choice. On the other hand, if you're aiming to pay off your mortgage and live debt-free in retirement, then a Reverse Mortgage might be a better option.
Of course, there are pros and cons to both options. With a HECM, you'll have to pay monthly premiums, but you won't have to make any repayments until the loan is due. With a Reverse Mortgage, you won't have to pay any monthly premiums, but you will be required to make repayments once the loan is due.
Ultimately, the decision of which option to choose depends on your individual circumstances. If you're not sure which one is right for you, then we recommend speaking to a financial advisor. They'll be able to assess your specific situation and offer guidance on which option would be best for you.
What Are Some Alternatives to Using HECM or a Reverse Mortgage?
If you are a senior citizen who owns a home, you may be considering using a Home Equity Conversion Mortgage (HECM) or a reverse mortgage to supplement your income. However, there are some alternatives that you may want to consider before making a decision.
One alternative is to sell your home and downsize to something more manageable. This will give you a lump sum of cash that you can use to supplement your income or for other purposes. Another alternative is to take out a home equity loan. This will give you access to the equity in your home without having to sell your home.
Both of these alternatives have their own set of pros and cons that you will need to consider before making a decision. However, if you are looking for a way to supplement your income and stay in your home, HECM or a reverse mortgage may be the best option for you.
What Are Some Tips For Using HECM?
If you are considering a HECM, there are a few things to keep in mind. First and foremost, remember that a HECM is a loan. As with any loan, you will be responsible for repaying the borrowed amount, plus interest and fees. It is important to understand the terms of your loan and make sure you can afford the monthly payments.
Another thing to keep in mind is that a HECM is a reverse mortgage. This means that the loan balance will increase over time as you accrue interest. It is important to be aware of this and plan accordingly. You don't want to end up owing more than your home is worth.
Finally, remember that a HECM is not for everyone. There are eligibility requirements that must be met in order to qualify. Be sure to speak with a financial advisor or housing counselor to see if a HECM is right for you.
What Are Some Tips For Using a Reverse Mortgage?
If you're considering taking out a reverse mortgage, there are a few things to keep in mind. Make sure you understand how the loan works and what it will mean for your finances down the line. It's also important to shop around and compare different lenders to get the best deal possible.
Consider using the money to pay off any outstanding debts you may have. This can help improve your financial situation and give you some peace of mind. You can also use the money to invest in home improvements or other projects that will increase the value of your home.
Whatever you do, make sure you stay on top of your loan payments and don't let the balance get too high. If you do, you could end up losing your home. With a little bit of planning and care, a reverse mortgage can be a great way to improve your financial situation in retirement.