A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage. It is insured by the FHA and can be a valuable retirement planning tool. It allows homeowners aged 62 or older to convert part of their home equity into cash without having to sell their home or make required monthly loan payments.
It is especially useful tool for retirees since typically over 50% of their wealth is in their home’s equity.
1. Creates another source of retirement income
A HECM can provide:
- A line of credit
- Monthly tenure or term payments
- A lump sum (with limitations)
- A combination of these
This gives retirees another source of funds beyond Social Security and investment accounts.
2. Helps manage sequence-of-returns risk
One of the biggest risks in retirement is being forced to sell investments after a market decline.
Instead of withdrawing from a depressed investment portfolio, a retiree can draw on a HECM line of credit during downturns and allow investments more time to recover.
3. Preserves investment assets
Using home equity for part of retirement spending may allow retirees to:
- Delay withdrawals from retirement accounts
- Leave invested assets with more opportunity to grow
- Potentially reduce the chance of outliving financial assets
4. Provides liquidity without selling the home
Many retirees have substantial wealth tied up in their homes but relatively modest liquid savings. A HECM converts some of that illiquid wealth into accessible funds while allowing the homeowner to remain in the property.
5. Serves as a financial safety net
A HECM line of credit can be reserved for:
- Major home repairs
- Medical expenses
- Long-term care needs
- Unexpected emergencies
Having this backup source of funds may reduce the need to sell investments during unfavorable market conditions.
6. The available line of credit can grow
Unlike a traditional HELOC, the unused borrowing capacity on a HECM line of credit generally increases over time based on the loan’s interest rate and mortgage insurance factors. This can make it more valuable if it is established earlier and used later.
7. May improve tax flexibility
HECM proceeds are loan advances rather than taxable income. This can help retirees manage:
- Tax brackets
- Medicare IRMAA surcharges
- Taxation of Social Security benefits
- Timing of Roth conversions
Situations where a HECM may be especially useful
A HECM may be worth considering if you:
- Have significant home equity
- Plan to remain in your home for several years
- Need additional retirement cash flow
- Want to reduce pressure on your investment portfolio during market downturns
- Have limited liquid assets but substantial housing wealth
MONTCLAIR ELDER SERVICES • MARGOT NIJSURE, MA, NHA • 510-424-9722
MARGOT@MONTCLAIREELDERSERVICES.COM • WWW.MONTCLAIRELDERSERVICES.COM
Any content, resident submissions, guest columns, advertisements, and advertorials are not necessarily endorsed by or represent the views of Best Version Media LLC (BVM) or any municipality, homeowners associations, businesses, or organizations that this publication serves. BVM is not responsible for the reliability, suitability, or timeliness of any content submitted, inclusive of materials generated or composed through artificial intelligence (AI). All content submitted is done so at the sole discretion of the submitting party.
