What Sets Reverse Mortgages Apart from HECMs?

If you’re considering using your home equity to access cash, you may have heard the terms reverse mortgage and HECM thrown around. Although they’re similar in nature, there are a few key differences between these two options to consider. Here’s what you should know:
  • Age requirement: One of the biggest differences between a reverse mortgage and a HECM is the age requirement. Reverse mortgages are typically available to those who are 55 or older in most states, while HECMs are only accessible to individuals who are 62 years old or older.
  • Payout options: Another difference to consider is the payout options available. HECMs offer more flexibility in terms of how you can receive your funds. You can choose to receive a lump sum, a line of credit, or a regular monthly payment. With reverse mortgages, you’re typically limited to receiving one lump sum.
  • Tax implications: Reverse mortgages and HECMs also differ when it comes to tax implications. With a reverse mortgage, the cash you receive is considered a loan advance, so it isn’t taxable. However, if you choose to sell your home later, you may have to pay capital gains tax on any profit you make. HECMs, on the other hand, are insured by the government and aren’t subject to taxes.
  • Loan limits: Finally, it’s worth noting that HECMs typically have higher loan limits than reverse mortgages. This means you may be able to access more cash with a HECM if you have a high-value home.
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Before deciding whether a reverse mortgage or a HECM is right for you, it’s essential to talk to a financial advisor to assess your unique needs and circumstances. By understanding the key differences between these two options, you’ll be better equipped to make an informed decision about how to access your home equity.

Understanding Reverse Mortgages and HECMs

Reverse mortgages and Home Equity Conversion Mortgages (HECMs) are two options available to senior individuals who need access to cash quickly. These mortgage options enable homeowners to borrow money against the equity in their homes. The amount of money that a borrower receives depends on several factors, including the age of the borrower, the value of the home, and the interest rate. Both reverse mortgages and HECMs are secured by the borrower’s home, and the loan does not need to be repaid until the borrower no longer lives in the home. However, there are notable differences between these two mortgage options, which will be explored in this article.

Age Requirements for Reverse Mortgages and HECMs

The age requirement differs between reverse mortgages and HECMs. Reverse mortgages are accessible to individuals who are 55 or older in the majority of states, while HECMs are accessible to those who are 62 years old or older. This means that if you are 55-61 years old, a reverse mortgage may be the only option available to you. However, it is important to note that borrowers who take out a reverse mortgage or a HECM must own their home and have a significant amount of equity in it. The equity in the home is the key factor in determining the maximum amount of money that the borrower can receive.
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Flexibility in Payout Options with HECMs

HECMs offer more flexible payout options, whereas reverse mortgages are limited to one lump sum payment in the majority of instances. With HECMs, seniors have several options to choose from when receiving their loan proceeds. These include: • Tenure payments: This payout option provides borrowers with a fixed monthly payment for as long as they live in their home. • Term payments: With this option, borrowers receive a fixed monthly payment for a set number of years. • Line of credit: This option provides the borrower with a line of credit that they can use as needed. • Modified tenure: This option allows borrowers to combine a line of credit with monthly payments. • Modified term: With this option, borrowers receive a line of credit and monthly payments for a set number of years.

Limited Payout Options with Reverse Mortgages

Reverse mortgages offer fewer payout options compared to HECMs. The majority of reverse mortgages only offer a lump sum payment option, which may not be the best fit for seniors who need a steady, reliable income. While some reverse mortgages offer a monthly payment option, these are less common than with HECMs. It is important to note that interest is charged on the loan balance of both reverse mortgages and HECMs.

Differences in Eligibility for Reverse Mortgages and HECMs

As previously mentioned, HECMs are only available to individuals who are 62 years old or older. However, eligibility for a reverse mortgage depends on whether or not the state allows it for individuals as young as 55 years old.
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Another difference between eligibility for these two mortgage options is that borrowers must also attend a mandatory counseling session before receiving a HECM. During this session, a counselor will explain the details of the loan and help the borrower decide whether it is a good fit for their current financial situation. These counseling sessions are not required for reverse mortgages.

Comparing Reverse Mortgages and HECMs: Pros and Cons

Pros of Reverse Mortgages: • May be accessible to individuals as young as 55 years old in some states • Can receive a lump sum payment • No required counseling sessions Cons of Reverse Mortgages: • Limited payout options (usually only a lump sum) • Higher interest rates compared to HECMs Pros of HECMs: • More flexible payout options • Lower interest rates compared to reverse mortgages • Required counseling sessions with a qualified counselor Cons of HECMs: • Only accessible to individuals who are 62 years or older • Borrowers must attend a counseling session In conclusion, both reverse mortgages and HECMs offer seniors access to cash by borrowing against their home’s equity. However, these two mortgage options differ in eligibility, payout options, and other key factors. It is highly recommended that seniors consult with a financial advisor or counselor to determine which mortgage option best fits their individual financial needs.

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