The Home Equity Conversion Mortgage, or HECM, is commonly referred to as a “Reverse Mortgage.” The concept dates back to the 1960’s, and was codified in the 1980’s, when the guarantee of the U.S. Government was added. Reverse Mortgages have been used for years, but far too often they were more abused than used. Recent modifications and clarifications have made the products more adaptable, easier and less expensive to use, somewhat safer, and much more flexible in a long-term financial planning environment.
For those who are truly new to the concept of a Reverse Mortgage, here are some basics:
- In order to understand what it means, it may be helpful to examine the real name of the concept, the Home Equity Conversion Mortgage (HECM)
- As the name implies, the mortgage is made available to the homeowner (or prospective homeowner) based on the amount of equity in the home
- Strangely, the home does not have to be owned by the applicant for the HECM, as one purpose is to assist the Buyer with the actual funding and purchase (we’ll come back to this)
- In every HECM, funds are provided to the home’s owner or purchaser, and no HECM payments of principal or interest are ever required once it is in place
- These “phantom payments” are made as ledger entries against the ongoing value of the home
- The homeowner is allowed to stay in the house and make no payments on the HECM, assuming that the homeowner stays current on property taxes, home maintenance, and insurance
- Note that these requirements are, for the most part, the same as general home ownership and lending requirements, so the burden is no greater
- Repayment of the Reverse Mortgage is optional while the owner is alive, and will generally be triggered when the last owner has died or vacated the premises for one year
- When the HECM owner (or the estate) has to repay the loan, beneficiaries have the first chance to purchase the home by repaying the HECM balance
- Should no beneficiary want to purchase the home, the mortgage company will sell the home, repay the balance, and refund any overage to the estate
- The best part, however, is the Federal Government’s guarantee to pay any negative HECM balance due after the home is sold
- The preceding rules, once understood, should add to the respectability of the HECM, as misunderstanding always produces fear
In recent years, the Reverse Mortgage has been adapted to serve buyers, using the “HECM to purchase.” With this type, the home is purchased using some cash and the HECM at closing. Once closed, no payments are ever due on the property during the owners’ occupancy. The HECM to Purchase provides several benefits:
- Using this tool, a home is purchased for an agreed-upon sale price, but the Buyer only brings a fraction of the cost to the table
- During the homeowners’ lives, or until the home is abandoned, the Buyer pays no principal and/or interest payments
- Using this method, a buyer can afford more home than through a cash purchase
- The buyer(s) have the option to move to a nicer neighborhood than with conventional financing or cash
- More assets are available to the buyer after the purchase, so investment accounts will be larger and better prepared for future investment income and growth
Further considerations when contemplating a Reverse Mortgage include:
- If the HECM borrower decides to receive the benefits in installment payments, all payments received are tax-free, as they are merely from equity in the home
- If there is remaining equity upon death of the homeowner(s), the estate gets that equity
- If the Reverse Mortgage balance exceeds the value in the home, Uncle Sam pays up the difference!
- So, if your heirs would like your property some day, they should know that they will be obligated to cough up enough cash to repay the HECM, or 95% of the current market value, whichever is less
- They will have a first refusal right to do exactly that
- Problems may arise if there are multiple beneficiaries who disagree on such things as the value or disposition of the home
The good news? You won’t be around to have to referee the arguments. It’s your money! And your home! And your heirs! Respect those items and live happily ever after in a home of your choice.
If you believe that the Reverse Mortgage may fit your situation, call the show, or give us a call at the office (904) 685-1505. Remember, you can schedule a free consultation on the phone or on our website, www.vanwiefinancial.com.
Van Wie Financial is fee-only. For a reason.