What is a Home Equity Conversion Mortgage?

Simply put, a Home Equity Conversion Mortgage (or HECM) is a financial product that allows homeowners, over the age of 62, to extract equity from their homes in tax-free fashion.  HECM’s are only available through FHA approved lenders.  HECM’s are loans secured by a first mortgage on the homeowner’s residence with loan proceeds paid out over time or in a lump sum.  HECM’s do not create a repayment obligation as long as the homeowner resides in their home and keeps real estate taxes current.

According to a new study from the Urban Institute, approximately 10% of the homeowners aged 62 and older would benefit from the use of a HECM.  For a large swath of older Americans — specifically those with more than $100,000 in home equity but $50,000 or less in liquid net worth — converting home equity into cash represents a significant retirement strategy. This study shows that millions of U.S. households lack adequate income and savings, but possess a significant amount of home equity wealth.  For these households, liquefying a portion of their home equity by converting it into cash could allow them to pay back debt to eliminate or reduce monthly debt payment burden, or boost household income.

However, the researchers also found that use of equity-release products has been low. Citing numbers from the University of Michigan’s Health and Retirement Study, the Urban Institute notes that in 2014, just 0.9% of homeowners age 62 and older had a HECM; by comparison, 1.8% had sold their homes to tap equity, 1.4% used a cash-out refinance, and 11.4% had an active home equity loan, second mortgage, or line of credit.

Many households carrying mortgage debt into retirement may not be able to afford monthly payments, and could access liquidity and eliminate a monthly debt payment burden. Impediments to extracting home equity can be attributed to factors that include an aversion to debt and a general desire to stay financially conservative, a desire to leave a bequest or save for emergencies, fear of losing the home, product complexity, high costs, and fear of misinformation and fraud directed at the elderly.  HECM’s are not a viable product for every older homeowner.  But, a clear and frank discussion of this valuable product with a financial planning expert can help educate homeowners and alleviate erroneous fears.

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