Can You Afford a HECM?

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What’s a HECM? It’s a federally insured Home Equity Conversion Mortgage sponsored by the US Department of Housing and Urban Development through the Federal Housing Administration. You may know HECMs better as “reverse” mortgages, a way for you to get a tax-free cash advance from the equity in your home if you’re part of the over-62 crowd.

Money from a reverse mortgage can be used for almost any purpose. Even better, as long as the house remains your principal residence, you will not have to repay the loan. And, thanks to this year’s stimulus plan, the loan limit on HECMs was raised to $625,500. This temporary increase stays in effect until December 31, 2009 unless extended by Congress.

HECMs may sound like a good deal. But before you apply, be aware of the costs. You’ll have to pay some costs upfront, out of your savings. Others can be financed by the loan, but will decrease the amount of money you can get.

Here’s a partial list of what to expect.

  • Origination fees are payments to the lender to process your loan. The fees can be financed as part of your loan.
  • Closing costs include title search, title insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and appraisals. Most closing costs can be financed with the loan.
  • Mortgage insurance protects both you and your lender and insures that your contract will be carried out as promised. The initial premium is financed through the loan, reducing the amount available to you. Monthly premiums are added to your loan balance.
  • Servicing fees are amounts your lender charges for services such as sending account statements and disbursing loan payments to you. Initial fees are deducted from available funds. The recurring monthly charge is added to your loan balance.
  • HECM counseling provides you with information about reverse mortgages and alternatives that may be more appropriate to your circumstances. Counseling can be free or low cost and is typically paid out of pocket by you.

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