Thursday, November 9, 2017

How to Use an HECM Line of Credit as an Emergency Fund

Many seniors turn to a Home Equity Conversion Mortgage (HECM), or reverse mortgage, only when their nest egg is depleted and they are struggling to cover their living expenses. Instead, it may be in your best interest to establish a HECM line of credit as soon as you are eligible so it is available when — and only when — an emergency expense arises.

The best strategy for using an HECM line of credit is not as a last resort, but rather as a well-planned, tax-free emergency fund of sorts. Setting a plan in motion now to handle unexpected financial needs in your future may help you avoid a crisis down the road. 

In other words, you need to planning for how to access the equity you have in your home before you truly need it.

Read on to learn more about HECM lines of credit, how you can use them, and how they could help you cope with any surprises during your retirement years.

What Is the HECM Program?

The HECM program was established as part of the Housing and Community Development Act of 1987, and is federally regulated and insured by FHA. It allows homeowners to convert a large portion of the value of their homes into cash that is typically tax-free, while retaining ownership of their home. 

The homeowner does not incur a new mortgage payment; their only obligation is to live in the house and pay for its property taxes and homeowner’s insurance. Of course, it is worth consulting a certified public accountant to review the details of your specific situation.

The term "reverse mortgage" is often applied to an HECM because it works in the reverse way of a traditional mortgage. Instead of the homeowner making a monthly mortgage payment, the bank gives money to the homeowner. 

This money can be delivered as a line of credit to be used as needed, a lump sum, equal monthly payments, or a combination of these options. We’re going to focus largely on the line of credit option, because it is the option best-suited for use as an emergency-fund-in-waiting.

Unlike a loan or other traditional lines of credit, the money that is used from the HECM line of credit does not have to be paid back as long as the homeowner lives in the house. Instead, the amount used is covered by the eventual sale of the property when the homeowner moves into a new home or passes away. 

The home is the only asset involved and it is a non-recourse loan secured by the FHA, no debt related to the HECM is taken on by the homeowner’s spouse or heirs.

When Can You Get an HECM?

Making the most of an HECM is all about timing. All too often, seniors on a fixed income find themselves unable to keep up with their expenses when they face unexpected financial demands. 

If you wait until this kind of situation arises to take out an HECM line of credit, the amount of money available right away may be limited, and the initial fees associated with setting up the line of credit would further deplete the funds. But you can make the HECM work for you by setting it up well before a financial emergency takes place. 

Under the terms of a HECM line of credit, the available balance will gradually increase over time as interest compounds, which means it is in your best future interest to let the line of credit sit untouched for as long as it is unneeded.

Read More: Reverse Mortgage Guide

You become eligible to take out an HECM as soon as you turn 62 years old. Should you choose line of credit option, this is usually the ideal time to do so, because you are either still working or have only recently retired, so you may not yet have felt the strain of a fixed income. 

Since you may not need to use any of your available line of credit at this time, you have the option to leave it alone and let the available balance increase. Ultimately, more money in the account means more growth as time passes, due to the compounding interest on a HECM line of credit.

For this strategy to work, it is very important that you have the discipline not to draw from the money for small or unnecessary expenses. 

If you are planning to preserve your HECM line of credit as an emergency option, we trust that you are more financially responsible than most. Use the money only when you absolutely need to cover an essential expense and cannot do so any other way. You should consider it an emergency fund.

How Does Your HECM Change Over Time?

Viewing your HECM line of credit as an emergency fund means you do not plan to rely on it as a primary source of income when you retire. It is separate from your retirement savings and investments. If you start it at age 62, it will accrue value over the years until you need to draw from it.

The program is designed so that the principal amount grows over time, and the growth rate is accelerated if interest rates and inflation rise. If you use it wisely, your HECM line of credit could surpass the value of your home with enough time.

It’s important to remember that this is only the case as long as you are living in the house on which you took out the reverse mortgage. 

When Do You Use Your HECM Line of Credit?

Eventually, you will likely have a pressing need to take advantage of your reverse mortgage. You may need to make sudden household repairs, which can get expensive very quickly. 

You will likely find that your medical expenses grow over time, and medications, surgeries, ongoing treatments, or home health equipment are not always covered by Medicare or Medicaid. Other financial emergencies could arise from a change in income, or the death of your spouse or another beloved family member.

On the happier side, you may want to have a source of extra funds for special occasions. Perhaps you want to take a vacation or attend a loved one’s destination wedding. 

You deserve to relax during your retirement without worrying about depriving yourself just to cover basic living expenses. Your years as a responsible homeowner should work in your favor at this time.

Is an emergency fund already part of your financial management plans? Look into your options today to avoid any costly scares in the future. Consulting a certified reverse mortgage professional may help you determine what will work best for your individual situation so you can enjoy your retirement to the fullest.

Contributed by: Mehran Aram, a graduate from the University of San Diego School of Business in 1984, founded Aramco Mortgage in 1998 after spending almost five years in the industry. Today, Mehran Aram is President and CEO of The Aramco Group, and has recently been honored with the distinction of CRMP(Certified Reverse Mortgage Professional) a certification held by less than 50 brokers nationwide. Mr. Aram currently heralds the title of “Mortgage Analyst” on San Diego radio stations: AM 600 KOGO, AM 760 KFMB, AM 1170 KCBQ, AM 1210 KPRZ, FM 98.1, and Fox News Monterey’s AM 1460. Garnering endorsements across the state of California, including from radio personalities, Roger Hedgecock, George Chamberlin, Mark Larson, and Ladona Harvey, Mehran Aram along with his nearly 20 years of industry experience has effectively become California’s Mortgage Expert in reverse mortgages, refinances and purchase loans, among many other loan products.

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