HECM (pronounced HEKUM) is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development. A HECM is not a government loan. It is a loan issued by a mortgage lender, but insured by the Federal Housing Administration, which is part of HUD. They stepped in to make sure that lenders follow mandatory rules to protect the borrowers.
Myth No. 1 The lender owns the home.
Like all mortgage loans, the HECM loan is secured by a lien and you will not lose your home as long as you continue to meet the loan obligations. The loan obligations include: living in the home, maintaining the home according to the Federal Housing Administration requirements, paying property taxes and paying the homeowner’s insurance.
Myth No. 2 The borrower is restricted on how to use the loan proceeds.
The proceeds from a HECM loan can be used for almost any purpose. Many borrowers use them to supplement their retirement income, delay receiving social security benefits, pay off high—interest credit cards, pay for medical expenses, remodel their home, or help their adult children. Prudence along with budgeting should be the proper approach to enjoying proceeds received from your HECM loan.
Myth No. 3 Once loan proceeds are received, you pay taxes on them.
Like any loan, HECM proceeds are paid out tax—free as they are not considered income. However, it is recommended that you consult your financial advisor and appropriate government agencies for any effect on taxes.
Myth No. 4 The home must be free and clear of any existing mortgages.
Actually, many borrowers use the HECM loan to pay off an existing mortgage and eliminate monthly mortgage payments. Paying off the existing mortgage and any other liens is required as part of the loan. It is the borrower’s responsibility to continue to pay for property taxes, homeowner’s insurance and home maintenance.
Myth No. 5 Only people with financial hardships need HECM loans.
The perception that HECM loans are only for “financially strapped” borrowers is changing — affluent senior borrowers with multi-million dollar homes and healthy retirement assets are using HECMs as part of their financial and estate planning, and are working closely in conjunction with financial professionals and estate attorneys to enhance their overall quality and enjoyment of life. For more information call today.