What is a Home Equity Conversion?
A Home Equity Conversion is a legal contract where a 62-year or older homeowner having enough home equity can covert a percentage of that equity into a savings fund and easily accessible cash when needed.
In addition, the fund grows with interest, tax-free, without any repayment requirements while the homeowner continues to live in his or her home, and continues to meet a few basic requirements.
When guaranteed by the FHA as a non-recourse contract, the FHA refers to a Home Equity Conversion as a HECM Reverse Mortgage. However, it is not a mortgage, a bank is not involved and a person’s home is not collateralized.
Why did Reverse Mortgages have such a black eye in the past?
During the real estate bubble when people were being given mortgages they were not qualified for, homeowners also were given a reverse mortgage that was easily accessible funds equivalent to a portion of their home equity. Many used those funds like a credit card.
When the time came to pay their real estate taxes and home insurance, they didn’t have the money set aside and their homes were foreclosed on. They blamed the reverse mortgage but the problem was that they were not as financially responsible as they should have been, and never should have received a reverse mortgage. They would have lost their homes anyway for non-payment of real estate taxes.
Federal regulations now are much stricter ensuring that a homeowner doesn’t get into this type of trouble.
What do you think is the most single compelling reason for getting a Home Equity Conversion?
To eliminate mortgage payments completely which frees up money that changes a homeowner’s cash flow situation positively. If a homeowner has a home mortgage, it is paid off completely from their available home equity and they then own their mortgage free home outright.
Other than paying off a home mortgage, what are some of the diverse reasons people you have helped have wanted a Home Equity Conversion ?
To pay off other debts such as credit cards, home improvement loans, medical obligations and auto loans, plus improve their quality of life by making home improvements and remodeling, elective surgeries and dental procedures, vacations, college education gifts and supplement their social security and other income.
Today, one of the biggest financial fears senior homeowners have is medical bankruptcy, which often can be avoided when using available funds from a Home Equity Conversion.
Isn’t a Home Equity Conversion the same thing as a “home equity line of credit” loan from a bank with monthly installment payments?
Similar terms can be confusing. A Home Equity Conversion is not a "home equity line of credit”. A Home Equity Conversion is not a bank loan where a homeowner borrows the bank’s money. A Home Equity Conversion is where the homeowner can borrow their own money from their available home equity, not from a financial institution’s line of credit. A portion of their equity merely has been converted for peace of mind to be easily available to them if and when needed. It is referred to as a HECM.
A homeowner’s home is not at risk as collateral. The homeowner retains full ownership of their home and the deed. And they are not required to make any repayments until they no longer live in their home or until their home is sold.
A “home equity line of credit” (HELOC) refers to a homeowner taking out a home equity loan from a bank, savings and loan or credit union where there are either monthly loan or interest payment requirements, and the loan can be recalled at any time. The homeowner is borrowing the bank’s money and using their home equity, their savings, as collateral to protect the bank’s loan to the homeowner.
With a Home Equity conversion (HECM), a homeowner can repay what they borrowed anytime but that’s their option. Whatever is in their line of credit unused is still their home equity.
Which socioeconomic levels can benefit best from a Home Equity Conversion?
If we look in Texas’s major cities with $300,000-$800,000 homes, which is where a Home Equity Conversion (HECM) is most popular, the benefit to all of these homeowners is the same, but for different reasons. Examples might range from home modifications to debt retirement. The actual price or appraised value of the home is not a factor.
What do you feel are the major benefits to having a Home Equity Conversion for fitting a senior homeowner’s needs?
For those homeowners that want to remain in their home as long as possible - or cannot afford or want to move to assisted living or a nursing home - a Home Equity Conversion provides access to money as needed to remain in their home as long as they continue to pay their real estate taxes and insurance on time and maintain their home.
Best of all, no loan repayments are required while they continue living in their home, and their taxes, insurance and home maintenance can be paid from their available Home Equity Conversion funds.
Can any senior get a Home Equity Conversion?
No. To qualify a senior homeowner has to be at least 62 years old meeting several requirements that include a favorable credit report and payment history. If he or she has a mortgage, adequate equity has to be available to pay off the existing mortgage.
Is it easy to apply and qualify?
The application is easy if all required information is provided to the licensed loan specialist. Qualifying is a bit more involved because the information provided has to be verified. A title company will do an in-depth financial history.
Frequently, non-disclosed information surfaces that then has to be explained by the homeowner. If adequately explained, an exception usually results and the homeowner then qualifies.
Do you lose ownership of your home when you get a Home Equity Conversion?
No. The homeowner retains title to the home unless the conditions agreed to are violated like non-payment of taxes or insurance. The home may be foreclosed in such situations.
How is the money that has been borrowed with a Home Equity Conversion paid back?
At the time the last homeowner no longer lives in the home, the only obligation is to repay the borrowed equity plus interest. It is a non-recourse loan so no family member is responsible for the obligation.
Usually the obligation is paid out of the selling proceeds of the house, with the net proceeds either inherited or donated per estate instructions.
An option sometimes used is for an heir to take out a mortgage on the home they want to inherit for the amount of the Home Equity Conversion borrowed funds that repays the borrowed funds. At that point, the inheritance is totally theirs subject to the conditions of the new mortgage.
Or instead of taking out a new mortgage, the Home Equity Conversion can be paid in full, allowing ownership transfer free and clear.
Is there any downside to a Home Equity Conversion?
There may be several depending upon who is affected. For example, if a family member has been expecting to inherit the house free and clear, possibly to just sell it, the Home Equity Conversion obligation reduces their inheritance as well as how long they had to wait for the inheritance.
Another is when a senior homeowner who is not in the best of health refuses to leave their home rather than being moved to a nursing facility or moving to an assisted living facility. The care required to attend to the senior living in their home frequently falls on a family member. Yet as long as the Home Equity Conversion obligations are continuing to be met, the senior homeowner can legally remain in their home.
Another are injuries from falling or other mishaps from living alone where there isn’t anyone to provide immediate care.
Or money available from the Home Equity Conversion funds have not been properly used to make the home easier and safer to be lived in.