With recent regulatory changes made by the Department of Housing and Urban Development (HUD), Home Equity Conversion Mortgages (HECM) have more built in safety measures than ever before. HECM loans allow seniors the option to avoid tapping into other retirement resources by allowing them access to a portion of their equity to eliminate their monthly mortgage payment and access proceeds that are tax free*. This is a major advantage over the home equity line of credit for several reasons listed below. 1
1) Repayment Times
HELOCs have specific repayment requirements that are subject to interest rate spikes when not made on time as well as a resetting rate that could potentially double monthly payments and change the borrower’s monthly cash flow which may impact the borrower’s quality of life. HECMs, on the other hand, don’t become due until the borrower moves or sells the home, passes away, or fails to fulfill the loan obligations.** Until one of those events takes place HECM variable rates can fluctuate, but only affect the outstanding loan balance and not the total proceeds available. 1
2) Financial Assessment Rules
New regulations implemented by HUD include the requirement that lenders calculate the borrower’s willingness and capacity to meet all financial obligations including property taxes and insurance costs. If necessary, funds from the proceeds can be set aside to cover these expenses. To ensure that borrower’s follow through on these payments, which are requirements of a HECM loan, HUD implemented requirements to reduce the reverse mortgage foreclosure rates. 1
3) The Adjustable Rate HECM
The adjustable rate HECM may be a good option for borrowers as it allows the most flexibility, interest rates currently and historically have been low, and the unused line of credit grows*** with the rise of home equity without the need to go through the refinancing process 1
4) Servicing and Foreclosure Policies
Under a HELOC the lender may cancel the loan upon a spouse’s death even if both are listed as borrowers if the initial loan determination was based on the income information of the deceased spouse and the surviving spouse is responsible for any remaining debt that the estate does not cover. The HECM is a “non-recourse” loan. If you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home are required to be used to repay the debt. 1
* Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
** You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
*** The reverse mortgage loan balance grows at the same rate as the line of credit. The line of credit growth is only a benefit if the line of credit is not used to allow for the line of credit to grow over a significant period of time and then the funds are accessed during the life of the loan.