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Home Equity Conversion Mortgage (HECM)
In it's most basic sense, a Home Equity Conversion Mortgage is a loan, secured by a home, where repayment is deferred to a later date - generally when the final borrower passes on or when the property is no longer the primary residence. The Home Equity Conversion Mortgage, or HECM, is regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA) a division of HUD.
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A Home Equity Conversion Mortgage, is the safest FHA-guaranteed version of a reverse mortgage, a loan for seniors aged 62 or older that allows them to convert a portion of their home equity into cash without selling their home.
A HECM is nothing more than a regular mortgage that has a very unusual repayment program. Due to the FHA involvement in the loan they provide two important guarantees. "The first is they back up the lender guarantee that no payments are required until after you permanently move out of the house. The second guarantee means that only home equity is responsible for the loan – not you, your heirs, your estate, your trust, or any other asset you own. This cannot be overstated. Only the house equity is responsible for paying the loan back, and if the home equity isn’t enough money at the end, then the FHA mortgage comes into play to assist with the difference - not the heirs." - Accola, Harlan J. Home Equity and Reverse Mortgages. Better Way to Live,Inc., A, 2018. (accola4@gmail.com).
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Overall, a home equity conversion mortgage can be a useful financial tool for seniors who want to tap into their home equity to supplement their retirement income or pay for unexpected expenses.
The process to receive a HECM loan
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The homeowner applies for a home equity conversion mortgage through a lender that is approved by the Federal Housing Administration (FHA) - this is where we will help you find the best lender to fit your needs.
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The homeowner's eligibility for the loan is evaluated; which is primarily based on their age, the value of their home, and the amount of equity they have in the home.
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If the homeowner is approved, the initial disbursement is used to pay off their existing mortgage balance. After the mortgage is paid off and there are any remaining proceeds, homeowners can then receive the funds in several ways: as a lump sum, monthly payments, a line of credit, or a combination of these.
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The homeowner does not have to make monthly mortgage and interest payments while they are still living in the home. Instead, the loan balance, plus interest, is typically repaid when the homeowner sells the home, moves out of the home permanently, or passes away.
*However, while still living in the house the homeowner will still be responsible for paying property taxes, homeowners insurance, and maintenance. -
If the loan balance is greater than the value of the home when it is sold, the FHA insurance fund guarantees that no borrower, or their heirs, are responsible for the difference.
Using a Brokerage vs a Lender for a HECM or a Reverse Mortgage
When it comes to obtaining a Home Equity Conversion Mortgage (HECM) or a reverse mortgage, there are differences in working with a broker compared to a lender.
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A broker is an intermediary who can help connect you with different lenders who offer reverse mortgages. Brokers can help you compare different loan options from various lenders and potentially find better rates or terms than you would be able to on your own.
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On the other hand, a lender is the institution that actually provides you with the loan. Some people may work directly with a lender if they have an existing relationship with them. However, you may not have access to as many loan options as you would with a broker.
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What are the comparisons between working with a broker vs a lender?
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There are a few potential drawbacks to working directly with a lender for a reverse mortgage:
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Limited options: A lender may only offer a limited range of reverse mortgage products, which may not be the best fit for your specific financial situation. Working with a broker may provide access to more loan options and lenders.
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Bias towards their own products: A lender may be incentivized to promote their own reverse mortgage products over those of their competitors. Brokers, on the other hand, have a legal obligation to act in their clients' best interests and are able to provide a range of products from many lenders.
There are several advantages to working with a broker for a reverse mortgage:
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More options: Brokers can help you compare multiple reverse mortgage products from different lenders, providing you with a broader range of options to choose from. This can help you find a loan that is tailored to your specific financial situation and goals.
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Negotiating power: Brokers have negotiating power with lenders and can often secure better rates and terms for their clients. This can potentially save you thousands of dollars over the life of the loan.
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Expertise: Brokers are typically experienced in the reverse mortgage industry and can provide you with valuable advice and guidance throughout the loan process. They can help you understand the different loan options, explain the costs and fees, and provide insights into the potential risks and benefits.
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Transparency: Brokers are required to disclose all fees and costs associated with a reverse mortgage, providing you with a clear picture of the true cost of the loan. They can also help you understand the risks and benefits of each loan option, allowing you to make an informed decision.
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Advocacy: Brokers act as your advocate throughout the loan process, ensuring that your best interests are represented. They can help you navigate any issues that may arise during the loan process and ensure that the loan is structured in a way that meets your needs.
Overall, working with a reputable broker can provide you with a number of benefits when obtaining a reverse mortgage. We are a brokerage with experience and a proven track record of success in the industry.
Do you have more questions? See our Frequently Asked Questions page or contact us below.
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