- A Traditional Home Equity Conversion Mortgage (“HECM”) is used when the borrower wishes to refinance an existing forward mortgage or HELOC obligation or extract an equity release in monthly cash flow from an existing principal residence. The fundamental requirements of a Traditional HECM in terms of residual income, age and Expected Interest rates, Maximum Claims and Principal Limits are all the same as described in the section “Basics” on this website.
- The options not to make mortgage payments, growth of unused Principal Limit, requirements to make the necessary property charges or risk losing the home, and the minimum Residual Income requirements all apply to a Traditional HECM transaction.
- You can use a Traditional HECM to payoff an existing mortgage, to payoff or replace a Home Equity Line of Credit (HELOC), and /or to take cash out of the equity in your home for any purpose.
- Any remaining equity is the property of the homeowner or the heirs, the property is always in name of the borrower(s), and borrowers will never owe any more than the current value of the property. And providing there is no default on taxes and insurance no one can force the homeowner(s) from the home.
Paying off an Existing Mortgage
- Paying off an existing mortgage with a HECM provides the borrower with future flexibility in monthly payments. In general, depending on age of the youngest borrower or non-borrowing spouse, you should likely have more equity in the home than the size of the debit owed on it. And the borrower will need to demonstrate sufficient residual income to maintain, insure and pay property tax on the property.
Paying off or Replacing a HELOC
- Usually, a home equity loan, a second mortgage, or a home equity line of credit (HELOC) has the requirements for the borrower of a higher monthly income, a well maintained credit score, and a stated repayment schedule. HECMs, on the other hand, have a very reduced income requirement suitable for retired borrowers with reduced cash flows and monthly repayment is an option.
- In a HELOC a lender may be able to limit any further disbursements under the line of credit if they believe the property has declined beyond a certain amount in value or if they believe the borrower will be unable to repay the loan. Additionally, the lender or bank itself may not have sufficient financial resources to meet its obligations to pay out additional draws on the line of credit. With a HECM, the government guarantees the funds due you, and can never limit the amount of the credit line or call the loan due until there is a Maturity Event. A Maturity Event basically means something that results in your HECM being called due and payable to the lender. One example is death or permanent leaving of the home by the last surviving (or last living in the home) co-borrower on the HECM
Taking Cash Out of the Equity in your Home
- If a borrower owns the home outright or with small amount of debt, they can liquidize that equity into a line of credit, a fixed monthly term payment or a tenure payment (much like an annuity that will pay out as long as the borrower remains in the home.) Or you can mix Term or Tenure payouts with a line of credit facility. Once again, repayments on the HECM are optional. But taxes and insurance must be paid.
Would you like to learn more?
- Click here for eBrochures, eBooks, FAQs and Videos!
- If you would like to know how much you potentially qualify for, and whether you possibly have adequate monthly cash flow, go to the HECM WIZARD and input your information.
- If you would like to reach out and talk with me, fill out the information on Contact Me or email at st.john.bannon@JMCapGroup.com