(Mar 25, 2023)
When leveraging home equity, you only have two options. First, you can sell your home for liquid cash, which will require you to vacate. Alternatively, you can sign up for a home equity loan with from a mortgage financier.
A home equity conversion mortgage gives you instant cash on equity and flexible payment options. Read on to discover how it works and what you need to qualify.
Home Equity Conversion Mortgage (HECM)
A home equity mortgage is one of the few types of reverse mortgages. Backed and insured by the Federal Housing Administration, it enables seniors aged 62 or more to leverage their home equity into cash.
HECM Guarantee
Similar to other loans, a HECM has a set of guarantees that cover you against financial implications. They include;
1. Flexible Repayment in Your Lifetime
The loan repayment is optional, as long as you occupy the home and are still alive. Therefore, you can make partial payments or forfeit altogether. However, the financier won’t compel you to pay until you decide to sell the house. If you pass on, the loan is repayable a year after death.
2. Home Equity as Collateral
The home equity acts as security as backed by the Release of Personal Liability form. Consequently, none of your property, trust, assets, or heirs will be responsible for the loan. If your equity is insufficient to cover the loan, the FHA-backed insurance covers the remaining amount.
How Do You Qualify for a HECM?
A home equity loan is more accessible than a forward mortgage. You only need to meet a set of prerequisites laid down by the Federal Housing Administration. So, before you apply for the loan, be sure to have the following qualifications:
-
You (or your spouse) should be 62 years or more
-
The home must be your primary residence
-
Not a defaulter of any outstanding federal debt
-
Have sufficient income and good credit history as proof that you’ll pay ongoing property taxes and insurance premiums
-
Take part in a consumer information survey administered by an approved HECM counselor
-
Make an upfront down payment of 25%-60% of your home value if you are buying a new home
- Be sure that the home is FHA approved
How It Works
A HECM requires no fixed monthly payments. However, you may incur some expenses in loan servicing and insurance payments. The amount you can borrow also depends on your home’s appraised value.
Here we examine the four primary tools that accompany a HECM:
1. Lump Sum Payment
You may receive the cash in the form of a one-off lump sum from the mortgage financier. The lump-sum comes in handy when you have an existing mortgage to clear out.
Housing expenses, including mortgages, account for a massive debt incurred in retirement. About 30% of retirees aged 62 years or more are still paying mortgages contrary to their wishes.
So, if you are more than 62 years old yet have 50% of your home equity, then it makes little sense to continue making mortgage repayments. Even if it seems affordable, it is not an efficient way to spend your cash flow. You could talk to your financial advisor on how to leverage the lump sum to clear your mortgage.
Besides mortgage payment, lump-sum is an alternative source of cash for credit cards, car loans, home improvement, and buying a new property.
2. Home Equity Conversion Mortgage Line of Credit (HECM LOC)
A home equity line of credit is a flexible way to leverage your equity into cash at your convenience. It allows you to convert into cash without monthly payments and revert to equity when you want. Moreover, you can choose the most appropriate time to make your repayments.
To crown it all, a HECM LOC has a guaranteed annual growth of 4%-6%. Regardless of a dwindling home value, high-interest rates, or an awful economy, your equity grows at current rates.
3. Monthly Payments
When you sign up for a conventional loan, your financier expects you to make monthly payments. Think of the thousands of dollars you’ll spend on mortgages for 15, 20, or thirty years! However, a reverse package is quite different because the financier pays you instead.
It all depends on your age, property value, and whether you occupy the property.
4. Combined Package
Some homeowners opt for a combination of all three payment options: lump sum, monthly paycheck, and equity line of credit.
Here is an example;
Michael owns a home worth $400,000 and an outstanding mortgage balance of $50,000. He can take a lump sum payment to clear the mortgage. In addition, he can take out an equity line of credit worth $100,000 at an annual growth rate of 5%. Michael still has a lifetime monthly paycheck of $500 to meet his daily expenses.
The advantage of having a combined package is that you can change your options at any time without refinancing the loan. If your home value decreases, the FHA insurance takes over the original loan repayment.
Home Equity Conversion Mortgage: Is It Worth?
Home equity is one of the greatest assets to secure a mortgage. It guarantees peace of mind, comes when needed, has flexible payment options, and annual increment on equity. Moreover, your equity acts as collateral so that you won’t lose your assets and investments.
If you want additional cash for retirement, reach out to a financial advisor to check for eligibility.
(Mar 25, 2023)
