A lot of terms relating to these home loans are confusing. Here are some things that you need to know about major terms relating to your loan application, as well as other specific practices relating to these home loans.
What is an HECM Loan?
HECM stands for “home equity conversion mortgage.” To put it simply, an HECM is a reverse mortgage that you get through the federal government’s HUD and FHA organizations. Other similar mortgages are available from private lenders, but they are mostly just referred to as reverse mortgages or reverse home loans.
In terms of their general purpose and the basics of how they are applied for and paid out, they are all very similar. The difference is that the government insures home equity conversion loans that are provided through FHA and HUD. They don’t insure private loans in the same way.
What is Home Equity and How is It Calculated?
Before you can understand how a home equity-based reverse mortgage works, you need to know how home equity is defined and calculated. Your home equity is the value of your home if you were to sell it at the present time, but any home loans you already have must be subtracted from that amount to get your current home equity amount. That number can go up or down as you repay loans or make additions and improvements to your home. It also depends on the current housing market.
In terms of your reverse mortgage, your current home equity value is only part of how the amount you can borrow will be calculated. Your age and any outstanding regular mortgage you may have will also factor in. There is also a cap on the maximum amount that you can borrow with this sort of loan, but that cap does change from time to time. It’s important to know what the current cap is before you apply. You can get that information from your lender.
How is a Reverse Mortgage Different from a Standard One?
It’s important to understand what type of loan you are applying for, so what is a reverse mortgage exactly? The term itself can be a bit confusing. It isn’t really the reverse of a standard mortgage. Both options involve borrowing against the value of your home. But the “reverse” part comes in because the lending company can pay you every month when you have a reverse home loan, rather than you making monthly payments back to them for a regular home loan.
Eventually, you will still owe the full amount of the loan plus interest, but not until you pass away or move out of your house. The idea that the lender pays you instead of you paying them monthly is the part that is “reversed.” Of course, the lender may not pay you every month when you get a reverse loan. You could opt to receive one large payment instead. So, in that way the name is a little misleading.
What is a Home Equity Line of Credit?
Another major term you will come across when applying for a home equity conversion mortgage is “home equity line of credit.” That simply means that you can request a credit line instead of set regular payments. Then you can just use that credit line when you need or want to, much like you would use a credit card.
As you can see, reverse home loans are quite flexible. You have a lot of choices as far as how you are paid. That’s what makes them useful for retirees looking to increase their available spending money.