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How to get loan proceeds in an HECM

Posted on: 15th May, 2006 05:06 am
HECM or home equity conversion mortgage allows you to convert your home equity into cash payments at regular intervals depending upon the payment option you choose.

There are several options by which you can receive cash payments or loan proceeds of a home equity conversion mortgage. The options are given below.
  • Tenure: It includes equal monthly installments as long as you live and occupy the property as the principal owner.

  • Term: Through this plan, you obtain equal monthly payments for a fixed period of time (the loan term) selected by you.

  • Line of credit: This option allows you to withdraw cash up to a maximum limit as long as you occupy the property as your primary home.

  • Modified Tenure: It allows you to obtain a part of the loan proceeds as line of credit whereas the rest can be received through equal monthly payments as long as you occupy the property as your primary home.

  • Modified Term: With this payment option, you'll receive a part of the loan proceeds as line of credit and the rest in the form of monthly payments for a fixed period of time (loan term) as specified by you.
No doubt, the HECM offers a wide range of options through which you can receive payments. However, you may switch over from one payment option to another by paying a certain amount of fee to your lender.

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How the interest rates are calculated on HECM loans? Is this loan available throughout the U.S.? Thanks.
Posted on: 15th May, 2006 12:52 pm

The rates on HECM loan are computed on the basis of the variable T-Bill (U.S. Treasury bills) interest rate plus margin. The adjustments are made either monthly or annually.

HECM loans are available throughout U.S. in all the 50 states, the District of Columbia and Puerto Rico. HECM credit lines are not available in Texas but available in all other states.
Posted on: 15th May, 2006 12:59 pm
I thought the following would be a valuable addition to this thread:

An interesting study has been released by the Center for Retirement Research at Boston College that concludes that the HECM tenure option (lifetime income) is likely the best financial option for most seniors.

"�We find that over a wide variety of assumptions about asset returns, the optimal strategy for all but the most risk tolerant households is to take a reverse mortgage in the form of a lifetime income. We are informed by the National Reverse Mortgage Lenders Association that only a small minority of borrowers choose this option, as most choose a line of credit. Our findings appear to be yet another manifestation of the widely documented reluctance of households to annuitize their wealth in retirement."

Statistics show that 78% of HECM borrowers opt for the line of credit option and only 5% select the tenure option. People seem sold on the virtues of the LOC option - flexibility, earnings on unused balance - and maybe aren't paying enough attention to the importance of a guaranteed income stream for life.

The big drawback of the tenure option is that you lose the monthly income stream (and have to repay the loan) if the homeowner must sell - to enter a nursing home, for example.

The BC study also finds that the strategy of taking a lump-sum payment and usingthe funds to purchase an immediate annuity can be a winning one particulalry at older ages:

"(A)n alternative to taking a lifetime income from a reverse mortgage is to take a lump sum and use that to purchase an immediate annuity from an insurance company. At age 65, these two alternatives produce very similar incomes, but at older ages, the strategy of combining a reverse mortgage with an immediate annuity yields a substantially higher income."

There will never be any single right answer, but this study surely indicates the overwhelming popularity of the LOC option may be misplaced.
Posted on: 15th Dec, 2006 09:12 am
Good information Tim. I was not aware of it.

Hope it will help all!
Posted on: 20th Dec, 2006 09:21 am
I have researched reverse mortgages and when I talk to lenders they overwhelm me with how much I can receive and the many 1000 dollars to initiate the loan. I only want to repair my debt free home at not more than $75,000. Can I just apply for $75,000. I don't need 300,000 dollars. Help!
Posted on: 28th Apr, 2009 12:19 pm

I believe you can definitely apply for a reverse motgage of $75,000. But most lenders would want to offer you a larger loan. I've also heard of senior citizens grant for home improvement which is available to people who are 62 years or older. This is specifically meant for repair and improvement of home. You can also go for a home improvement loans like an FHA insured 203(k) loan.
Posted on: 29th Apr, 2009 05:04 am
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