Is a Home Equity Conversion Mortgage right for my family?
If your parents are age 62 or older and own their home, they can use a home equity conversion mortgage to access their home equity and get needed cash—with no monthly mortgage payments required. If they have an existing mortgage, the home equity conversion mortgage will first be used to pay that off. And without that monthly payment, they’ll have more cash each month to spend as they wish.
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A home equity conversion mortgage can provide funds to help your parents live more comfortably
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No monthly mortgage payments are required
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Your parents—not the bank—own their home
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They’ll have to pay property taxes, homeowners insurance, and home maintenance as always
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The loan comes due when they no longer live in the home, for whatever reason
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Often, the home is sold to repay the loan (you can never owe more than the home is worth)
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Any leftover equity goes to the heirs
What is a home equity conversion mortgage (HECM) and how does it work.
A HECM is a type of reverse mortgage that allows eligible homeowners to convert a portion of their home equity into cash.
With a HECM, the homeowner receives payments from the lender and over time, the loan balance increases while home equity decreases. The loan is repaid when the homeowner moves out, sells the home or passes away.
Can the lender take the entire home value, leaving nothing for heirs?
No, the HECM program is structured to ensure that the loan amount will not exceed the home's value when it's sold. Any remaining equity after loan repayment belongs to the heirs.
What happens to the home when the borrower passes away or moves out?
Heirs have options: repaying the loan balance and keeping the home, selling the home and using the proceeds to repay the loan, or letting the lender sell the home to repay the loan.
How is the loan balance determined?
The loan balance includes the initial amount borrowed, plus interest, and fees. The balance increases over time, which is why it's important to understand the implications of a HECM.
Can heirs still inherit the home?
Yes, heirs can inherit the home by repaying the HECM loan balance or a percentage of the home's appraised value, whichever is less.
Are heirs responsible for repaying the loan?
Heirs are typically not personally responsible for repaying the HECM. The loan is repaid from the home's sale proceeds. If the loan balance exceeds the home's value, the FHA insurance covers the difference.
Why is HECM counseling required before the loan can be done?
Before taking out a HECM, borrowers are required to undergo counseling to ensure they fully understand the terms and implications of the loan. Heirs should encourage their loved ones to participate in this counseling.
What about your inheritance?
Since your parents would be borrowing money against the value of the house, and accruing loan interest and mortgage insurance payments, the loan amount will increase over time. That said, the home may appreciate in value—so it’s possible that there may be money left over from the sale of the house that would go you as the heir, once the loan is paid.
But it’s important to consider that while your parents having a home equity conversion mortgage could mean a reduced inheritance for you, it also can allow them to enjoy a more comfortable retirement that helps them stay in their home longer. That’s what makes it a helpful financial solution for many older adults.