The pros and cons of an HECM reverse mortgage

A reverse HECM mortgage is the most popular program, with more than 90% of seniors choosing it over the other two programs; Janitor and Jumbo. But it’s not perfect; There are both pros and cons to this program and potential borrowers should be aware of this before making a final decision to adopt one for their home.

These types of mortgages are only available to borrowers who are 62 years of age or older, who own their entire home (or have a very small mortgage), and who live in certain types of homes.

Unlike regular mortgages, which require monthly payments to pay back the principal plus interest, there are no such monthly repayments. With a regular mortgage, you risk losing your home if you don’t keep up with the repayments; With a reverse mortgage, however, there are no monthly repayments, so you don’t risk losing your home. In fact, title deeds remain in the hands of the borrower and never the lender. Unlike a regular mortgage where equity is returned to the home with each repayment; Equity is taken out of the house with every payment made to the borrower.

Of all the programs currently on offer, the HECM is the most popular. Here are some pros and cons of the program.

advantages

Its biggest plus is that the program is federally insured. The US government guarantees that the borrower will get every penny they are entitled to, no matter what. If the lender goes bust or the home’s equity is insufficient to pay the borrower, the government guarantees to foot the bill.

Most upfront fees and charges are capped so that whatever broker is used, the borrower can rest assured that the fees and charges they pay are fair and in line with government guidelines.

There are 5 different payment options. Fixed payments are made as long as the borrower lives in the home. Fixed payments are made for a set period of time. The borrower can opt into a line of credit and withdraw any amount at any time until the line of credit is exhausted (not available in Texas). A combination of a framework loan with fixed monthly installments as long as the borrower lives in the apartment. Or a combination of line of credit with fixed payments over a specified number of months.

Payments are tax-free and do not affect Social Security or Medicare benefits.

Disadvantages

There is a cap on the amount that can be borrowed. It depends on where the property is located and currently varies between $200,160 and $362,790. The Home Keeper program has a higher cap and a Jump program has no cap at all.

The upfront costs can be high as a mortgage insurance premium must be paid to guarantee the loan. This is 2% of the value of the house. There is also an ongoing annual premium of 0.5% of the home’s value. This can be a problem if the loan is repaid early.

Seniors who receive SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California) may find that these are reduced if they don’t spend their entire loan amount each month.

The above are some of the more important considerations, there are others. Before considering a HECM reverse mortgage or any other program, you should first seek advice from an independent financial advisor.