HECM (pronounced "heck-um") is an acronym for Home Equity Conversion Mortgage. It is more commonly known as a Reverse Mortgage.
A Reverse Mortgage is simply the opposite of a Forward (regular) Mortgage. Where the forward mortgage loan balance reduces as the years go by (by making monthly payments), a Reverse mortgage balance grows larger because you are not required to make any payments at all. So why would anyone want a Reverse Mortgage? Most of those reasons are financial in nature and the pendulum swings from the very poor to the very rich. A Reverse Mortgage allows the homeowner to access the equity in their home and pay off any current mortgage. And they are not required to pay anything back. No monthly payments....ever. Standard HECM loans can go up to $726,000.00 and the Jumbo products go up to $4 million.
Let’s look at a couple of reasons to get a Reverse Mortgage; Seniors living on a fixed income, often just their Social Security would benefit from never having to make another mortgage payment, and having access to more cash can supplement their retirement. The opposite of that is the very well-to-do homeowner who wants to access the equity in their home as a means of liquidity. Maybe for investments or just to free up some tax-free cash. At the same time, it pays off their current mortgage (if any) and they never have to make another mortgage payment.
Reverse Mortgages are available to anyone who is 62 or older. It must be a primary residence and there must be some equity in the home. So, if they currently have a mortgage, the equity is the difference between the value of the home and the amount of the current mortgage. Most HECM products require roughly 50% equity to qualify. You can also purchase a home using a Reverse Mortgage as well as refinance a current Reverse mortgage to capture any additional equity growth if the housing market has gone up.
Not only will the homeowner never have to make another mortgage payment, but they may also have cash coming to them as a result of the Reverse Mortgage. They will have a few options on how to receive that money. The most popular is in regular monthly payments or they can open a Line of Credit that they can draw from. That Line of Credit will have a growth rate that far exceeds traditional Savings accounts.
The other great thing is that most HECMs are backed by FHA/HUD. That means IF the lender does not do their job, is late on making payments to the homeowner, or becomes insolvent, then FHA/HUD will step in and administrate the remainder of the loan for the homeowner.
These types of loans are also NON-RECOURSE Loans. That means that the homeowner or their Heirs will never owe more on the loan than the house is worth. Knowing that the loan balance increases over time, if the homeowner wants to sell the home or the family needs to decide what to do with it after they pass away, it is only a matter of what the market will bear. If the family can sell for $310,000 but the loan has increased to $340,000.00, the family will NOT owe the $30,000 difference. Likewise, if the loan balance is $310,000 and they sell for $340,000 then the Heirs keep the profit.
Maybe this has helped you know a little more about that weird mortgage called a HECM. If you are interested as a Notary on learning more about Reverse Mortgages please consider becoming a member of our site to review our training videos and train LIVE with us once a month specifically on Reverse Mortgages.
Article by Beth Hathoot for Notary Stars 05/27/2021