What Is a HECM Loan?

What Are HECM Loans: The Only Guide You Need

As you approach retirement, you might discover personal savings and limited income are not enough to pay for living expenses. For example, whether you’d like extra income to help pay for home repairs or cover medical bills, HECM loans could be the solution you are searching for.

What is a Reverse Mortgage Loan?

Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds you receive can be used for almost anything, including paying off your existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving your retirement lifestyle. 

What Type of Loan is a Reverse Mortgage?

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due.

Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property.

It’s simple and easy— to qualify for a “HECM” reverse mortgage:

• You must be at least 62 years old.**
• You must live in and own your home. (Must be your principal residence).

Then your age, appraised home value, and current interest rates are used to calculate the amount you may receive.

Reverse Mortgages: The Most Important Features You Should Know

3 Most Common Reasons People get a Reverse Mortgage:

1. Eliminate Monthly Mortgage Payments:* One of the best reverse mortgage benefits! A reverse mortgage pays off your existing home mortgage. It eliminates your required monthly mortgage payments* – that can mean hundreds or thousands of dollars of extra cash in your pocket each month.
2. Stay in Your Home: It’s your home. Not ours. You remain the owner of your home and can stay as long as you wish. As the homeowner, you must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period. When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to you or your heirs.
3. Access Extra Cash: The money you receive from a reverse mortgage can be used for almost anything. Some homeowners use the funds to pay off common debt such as credit cards or medical bills. Others choose to make updates or well-needed repairs to their home – it could be as simple as replacing an old kitchen appliance or getting a new roof – it’s up to you! A reverse mortgage was created to give older Americans a way to improve their retirement lifestyle – your home’s equity can do just that.

HECM Loans vs. Traditional Mortgage Loans

It’s called a “reverse” mortgage because of the way your home’s equity is used, and importantly, how the loan is repaid by the borrower. Unlike traditional mortgages that require monthly mortgage payments, reverse mortgages give the homeowner options on how and when to pay the loan back.

Instead of traditional monthly mortgage payments, a reverse mortgage is typically paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home.

• Pay the loan back in one lump sum when the last borrower leaves the home.
• Make monthly mortgage payments (just like you are now), of any amount you choose! You can also adjust or stop your monthly payments whenever you choose. Whatever the loan balance remaining at the end of the loan term is paid off.
• Make payments of any amount whenever you choose! Whatever the loan balance remaining at the end of the loan term is paid off.

How Does a Reverse Mortgage Program Work?

Step 1 – Research

The first step is to find out more about reverse mortgages. The best way to understand if a reverse mortgage suits your specific situation is to call a reverse mortgage professional. At Smartfi Home Loans, LLC, no question is too big or too small. A Smartfi Specialists will walk you through a no-obligation consultation and quote to provide you with a snapshot of how a reverse mortgage can meet your needs, how much you may qualify for, and then help you decide the next best step.

Step 2 – Counseling and Application 

In order to safeguard your interests, HUD requires all HECM (Home Equity Conversion Mortgage) reverse mortgage applicants to undergo reverse mortgage counseling. During this time, your application will be completed.

Step 3 – Processing and Approval 

Your reverse mortgage professional will help you schedule an acceptable appraisal to determine the value of your property—a standard practice for any mortgage application. The appraisal will then be added to your application and submitted for underwriting review.

Step 4 – Closing

A closing agent will contact you to sign the final documents and discuss how you would like to receive your funds.

Why Consider a Reverse Mortgage in Retirement

• The tax-free money you receive is intended to support your retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to you!
• Increase monthly cash flow
• Pay off an existing mortgage (required as part of the loan)
• Pay credit card bills
• Pay medical bills
• Fund home repairs and improvements
• Pay property taxes and home insurance
• Travel
• Gifts
• Improve your lifestyle
• Invest or diversify your retirement portfolio
• In–home care

How to Qualify for a Reverse Mortgage Loan

It’s simple and easy to qualify for a reverse mortgage:

• You must be at least 62 years old for a HECM.
  •  (or at least 60 years old for a Smartfi Choice Jumbo Reverse Mortgage)**
• You must own the property and live in it as your primary residence
• The property must have an acceptable appraisal 

The borrower’s age, appraised home value, and current interest rates are used to calculate the amount you may receive.
Some other factors to know:

•  The property must be FHA approved.
•  Qualification is based on the youngest borrower on the application.**
•  Primary residence means that you must reside at the property consecutively for six months and one day per year.
• You must continue to pay property taxes, home insurance, any HOA fees, and continue to maintain the property.
• Reverse mortgages can be used to pay off existing mortgages on your home. In fact, if you have a traditional mortgage, it is required that you pay off this mortgage (and any additional liens on the property) with the proceeds of your reverse mortgage loan.

Common Questions

Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so you can understand the facts.

Does the bank own my home? 

No, the bank never owns your home. You remain the owner of your home and can stay as long as you wish. As the homeowner, you must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period.

When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to you or your heirs.

How much can I borrow?

Three factors are considered to calculate how much equity you can access:

• The age of the youngest borrower 

• Home value 

• Current interest rates 

Although we use the home value you initially provide us to calculate the preliminary loan amount, an independent appraiser must visit your home to ascertain the current value of your home. We then re-calculate the loan amount according to this official home value.

What if I have a mortgage already? 

That is absolutely fine.

If you qualify, a reverse mortgage will first pay off your existing mortgage and then give you the remaining proceeds. In fact, many of our borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage.

Will my children lose their inheritance?

Your children have options when it comes to your home. Typically the loan is repaid through the sale of the home. Your heirs can choose to sell the home, pay the loan and receive any remaining equity; or, they can purchase/refinance the home, and pay back the loan with a traditional mortgage.

Does a reverse mortgage require that I make monthly payments?

There are never any monthly mortgage payments. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home.

What you can use your reverse mortgage for?

The tax-free money you receive is intended to support your retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to you!

• Increase monthly cash flow

• Pay off an existing mortgage (required as part of the loan)

• Pay credit card bills

• Pay medical bills

• Fund home repairs and improvements

• Pay property taxes and home insurance

• Travel

• Gifts

• Improve your lifestyle

• Invest or diversify your retirement portfolio

• In home care 

Reverse Mortgage Safeguards

Consumer safeguards are created to ensure you and your family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for your benefit:

Counseling

The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi Choice, or other reverse mortgage,  to undergo third party counseling so that you feel completely comfortable with the process and understand all your options.

No Prepayment Penalty

You can choose to repay the loan at any time without incurring any additional costs.

Non-Recourse Loan

A non-recourse loan protects you from being held liable for the loan beyond the value of the home. Your financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due.

Addressing Other Concerns About Reverse Mortgages

Borrower Responsibilities

Taxes and Insurance

You are required to remain current on your property taxes, home insurance, and if applicable, condo fees and homeowner association fees.

Property Maintenance 

You are responsible for completing mandatory repairs and basic home maintenance during the life of the loan.

Occupancy Requirements 

The home must be your principal residence which means you need to live in your home consecutively for six months and one day of the year.

Plan your financial future with complete peace of mind with Smartfi Home Loans LLC’s reverse mortgage products. Call (877) 816-6706 or contact us online today to learn more about how to a reverse mortgage can meet your needs.