Seniors, age 62 and older, hold about 60 to 80% of their total net worth in their home’s equity, according to a recent study conducted by the National Council on Aging (NCOA). In most cases, these homes are owned mortgage free or with only a minimal mortgage outstanding.
To tap the equity using traditional channels like a HELOC or refi the homeowner will, in most cases, increase their total monthly debt obligation. Something that is not good for seniors living on a fixed income.
How can these senior homeowners tap into this equity without increasing their debt? You got it, the good ole Home Equity Conversion Mortgage (HECM); better known as the Reverse Mortgage.
Even with the recent changes made by FHA to strengthen the program, the HECM is still a very viable option for homeowners age 62 and older to tap into the equity they have paid so dearly to build in their home.
This program also presents a great opportunity for lenders to do more loans while helping more consumers. A win-win as they say for everyone.
Under the program, a homeowner 62 years old or older may use the loan to:
- Refinance and pay off an existing mortgage
- Take out cash, tax-free, up to 58% of the home’s value
- Create a line of credit based on the home’s value
- A combination of any of the above.
They can also use it to purchase a new home.
In any case, under the terms of the HECM loan, the homeowner is not required to make any payments toward the outstanding principal. The homeowner may at their option choose to do so, but they are not required.
Borrowers can pay as much or as little as they like toward principal and interest each month. They retain the control to regulate what remains outstanding on the home.
They are required to occupy the home as their primary residence, maintain it in good repair, and continue to pay the annual real estate taxes and homeowners insurance costs as they become due.
The loan balance becomes due when the borrower either sells the home, passes away, or no longer lives there as their primary residence.
This flexible repayment feature is just one advantage over traditional home equity options. As an example, with a HECM equity line, the unused portion of a borrower’s credit line grows over time providing more available funds.
This line of credit cannot be reduced or revoked as long as the borrower continues to hold up their end of the bargain. As important is the loan’s non-recourse feature. This means that they, or their estate, will never owe more than the home is worth when the loan is repaid.
Sounds like a pretty good deal for seniors and lenders. Although not for everyone, a HECM could be the vehicle whereby seniors may be afforded the independence and opportunity to live out their retirement years in the home they worked so hard to own. They could also keep from moving in with or being a burden on their children or other family members.
With traditional lending opportunities being a little scarce, and the competition for fewer loans increasing, HECM’s may offer a lender an avenue toward more revenue. They are worth a look at least.
If you plan to do them, learn the rules, understand the process, and do them right. Not just for you as a lender but for those to whom you provide this financing.
The home owner has worked very hard to create this home equity. Please help them to utilize it properly and to protect their investment. Their future depends on it.
As always, lend responsibly my friends.