HECM: Can It Ease a Senior’s Financial Stress?

A home equity conversion mortgage (HECM) is a lesser-known financial tool designed for seasoned deed holders. At essence, it’s a reverse mortgage. Backed by the FHA, it allows qualified seniors to reach some of their home equity while holding onto the home.

Why Do Seniors Take Out Reverse Mortgages?

Some older homeowners become cash-poor as most of their savings are locked in their homes.

Money problems compromise a senior’s quality of life. The HECM is an option to ease financial stress. With an HECM, the senior deed holder can keep the home, without monthly mortgage payment obligations.

Few people do this when they have no mortgage balance. But some might consider it—to get more monthly spending money without having to deal with new loan payments.

Solo deed holders may find the HECM especially attractive. Digging into home equity can ensure that a solo senior has assistance and funds to age in place. (The HECM depletes equity; note that this can backfire on a surviving spouse.)  

How Does the HECM Make Spending Power Available?

The HECM gives a homeowner spending power. This can allow a senior to outfit a home to age in place, or achieve comfortable, day-to-day living. Seniors can even use HECMs to buy a new primary home. Then they pay less for the home and conserve funds for other purposes.

A senior deed holder can access the equity by:

• Drawing payments from the account each month.

• Taking one lump sum at the HECM closing. Some borrowers put the sum in high-yield accounts and work with the funds from there.

• Opening a line of credit to use as and when it’s needed.

Or a blend of the above.

Wait, a Line of Credit? Isn’t That a HELOC?

No. A HELOC frees up funds, but the deed holder has to repay it monthly. When an older adult is living on Social Security, making monthly HELOC payments can be difficult. This is why a senior might opt for a reverse mortgage instead.  

And yes, the HECM is a reverse mortgage. The deed holder doesn’t have to pay it back unless they sell or leave the home.

Are There Drawbacks?

In return for the convenience of not being expected to pay the loan back while the deed holder is alive, there’s a price to pay. The interest rate on HECM funds is high—often somewhere between 7 and 12 percent.

Ask about mortgage insurance and fees, too. These can add significant costs.

The FHA backs and insures HECMs. Offsetting risk, with a HECM the senior can stay in the home—even if the equity runs out.

Call a company (Mutual of Omaha, Finance of America, or one of their licensed brokers) to learn about current HECM rates and terms.

How Do I Qualify?

Basic requirements are:

• Age, for one. Generally, this is a product for people aged 62+. If the person is too young, compound interest will siphon off a lot of home equity. An HECM can make sense if a person runs out of funds late in retirement.

• Accepting an approved counselor. This is a source of information and decision-making help. People close to the senior may attend the counseling meetings.

• Financial assessment of the applicant and the home. The home must meet FHA safety and maintenance standards. Note: Continuing home maintenance is required by the lender. 

The HECM has easier eligibility requirements than other borrowing options. There’s no set debt-to-income ratio or credit score requirement, though companies will run credit checks.

How Will an HECM Change My Monthly Budget?

Take out an HECM, and your housing costs will include the insurance and property taxes, and of course the upkeep of your home. But you no longer have to pay a monthly mortgage amount while you’re living.

Your heirs will resolve the mortgage once you have passed.

Then you can get a bumper sticker that says “I’m out spending my children’s inheritance” and mean it. If you have no one waiting to inherit your property, an HECM is especially attractive.

Wait a Minute. What Is the Impact on My Heirs?

The HECM ends at death—no exceptions. Your heirs will need to pay it off.

Some heirs may be in the position to pay it all off. Some refinance or sell the home to resolve the debt.

The reverse mortgage company will usually work with the heirs, but the estate must resolve the HECM  promptly. If probate drags on, look out. Foreclosure could happen if the HECM deadline passes—even if you left enough in value to your heirs to resolve it.

What Are the Alternatives to Taking Out an HECM?

Depending on the whole picture, an older adult could, alternatively:

• Sell the house. Use the proceeds to buy a smaller home, and perhaps invest in an annuity fund. Granted, selling and moving isn’t right for everyone. That’s why the HECM can be a meaningful option.

• Sell and downsize into an apartment. Before making this decision, note that the money an HECM depletes from equity every month may come out to less than the cost of renting.

• Or let one of your heirs move in and pay rent so that the senior has an income now.  

Before doing anything, have you asked about a possible loan modification for your current mortgage? Find out if lengthening your current loan could ease your monthly costs and solve your issues.

In a Class of Its Own

To avoid making monthly mortgage payments, the HECM is in its own class. There’s no other option that does this. But, as you can see, there may be other paths forward.

As always, choose your lender carefully. Never make financial moves under pressure, no matter where that pressure may come from. And if you have case-specific questions, speak with your professional adviser. Examine the pros and cons through an experienced lens.