Here at NewStyle Communities, many of our homeowners have used a Home Equity Conversion Mortgage (HECM) to purchase one of our homes! To make buying your new home easier, here’s some information about how the HECM works.
What is an HECM?
An HECM or reverse mortgage is a loan for senior homeowners that allows borrowers to access a portion of their home’s equity and uses the home as collateral. Unlike a traditional mortgage, monthly payments are deferred, and the loan balance increases over time.
There are many factors to consider before deciding whether a reverse mortgage loan is right for you. The first step is determining whether you are eligible. Speaking with an HECM counselor to discuss program eligibility, financial implications, possible alternatives, and repayment of the loan, is a good start.
There are requirements for you as a borrower, and for your home, as well.
- Borrower requirements:
- The youngest borrower on the title must be 62 years of age or older
- You must own the property outright or have considerable equity in the home
- You must occupy the property as your principal residence
- You must meet financial eligibility criteria as established by HUD
- Property requirements:
- It must meet all FHA property standards and flood requirements
- It must be a single-family home, or 2-4 unit home with one unit occupied by you, or a HUD-approved condominium project, or a manufactured home that meets FHA requirements
How an HECM is benefits you.
- No monthly mortgage payments are required.
- You may remain in the home indefinitely, even if the loan balance becomes greater than the value of the home, as long as you meet the loan obligations.
- HECMs are non-recourse loans, so you will never owe more than the lesser of the value of the home or the loan balance, so long as the home is sold to repay the loan.
Important things to know.
- The amount of money you can receive is based on the age of the youngest borrower, prevailing interest rates, and the lesser of the appraised value of the home, sale price or maximum lending limit.
- You may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
- Failure to meet these requirements can trigger a loan default that may result in foreclosure.
- Interest and fees are added to the principal balance each month, resulting in a rising loan balance over time.
Why do you have to pay for mortgage insurance?
Borrowers pay an initial mortgage insurance premium (MIP) at closing, as well as an annual premium of .5% of the outstanding mortgage balance. The mortgage insurance premium protects you by ensuring you will continue to receive your loan proceeds, even in the event that the lender becomes insolvent.