Home Equity Conversion Mortgages
HECM’s AND the USE OF EQUITY
Questions sometimes arise about using one’s home equity with a Home Equity Conversion Mortgage. Folks are worried about what happens when the equity is gone.
I. Security of Equity Remaining – HECM lenders normally only loan 50 – 60% of a home’s value. This leaves a lot of equity for future years. On a $200,000 home, the Principal Limit for a loan would be approximately $100,000. That leaves $100,000 less closing costs in equity. Let’s assume that number is big - $10,000 including fees, closing costs, etc. That leaves $90,000 in equity. The current house payment could be $1,500 per month. That payment disappears (except for Taxes and Insurance – assume $375 per month with a Principal payment of $1,125). If the interest rate on the HECM is 5%, the monthly charge against Principal is $417. The monthly savings is $708 current cash if there is a loan. Many borrowers make payments in excess of $2,000 per month. If there is no loan on the home, the HECM loan can be used as a financial planning tool. See future articles for Financial Planners and C.P.A.’s.
II. The home continues to Appreciate over time. See the enclosed chart. Assuming a longer term (10 years), the home will appreciate almost as fast as the interest will reduce the equity. My investor uses 4% nationally with Oklahoma sometimes being above that and sometimes below. Over ten years we are near the average.
III. What about needed Medical Care? The hope of many is to remain in the home until the last illness. That often does not happen. In-home care is becoming more common. Those costs will occur with or without a mortgage. There will be a cash outlay until funds are gone.
When the homeowner must move into assisted living or another care facility, any assets including the home must be used before any government assistance can occur.
I have a friend whose dad lived in a nice nursing home with a shared bedroom. It cost about $4,000 per month for his care. His roommate had the same room and care on Medicaid. The roommate had no out of pocket expense. When the money is gone, the resident continues with the same quality of care not paid for with his/her assets.