Understanding a HECM Reverse Mortgage as an Unstructured Loan

Let us begin with understanding that there are no institutions loaning money in a reliable and predictable manner for free. When money is borrowed, it must be paid back and some amount of interest will be due. For the borrower, what matters is how much interest, when payments are required, and at what point the entire debt must be repaid. Ideally, the payment should not exceed the borrower’s ability to pay. The more flexibility there is in the structure, the greater freedom and security for the debtor. Little wonder an unstructured loan can be attractive.

A Home Equity Conversion Mortgage (HECM) reverse mortgage as a line of credit, secured against one’s primary residence, is an unstructured loan. No payments, even for interest, are required and there are no pre-payment penalties. If the borrower elects not to make an interest payment, the interest each month is rolled into the loan. The debt is not due until the house is sold or the last borrower moves, dies or turns 150 years old.

That is as unstructured a loan as anyone can expect to get. You can borrow as you desire from the available funds, pay back what you want when you want, or leave the debt to be resolved after your death.

When payments are made, they go first to interest and fees. After these are paid in full, additional payments are applied to principal. That increases the available funds, which can be borrowed from again. Since the borrower controls when and how much interest is paid, it becomes possible to coordinate these payments for the greatest advantage against tax obligations.

Because the loan is unstructured, it can be used strategically to avoid withdrawals in a bear market and maximize tax deductions by paying interest in a bull market.

Structured loans are almost always “full recourse”. If a house secures the loan, both the property and the borrower can be pursued in a default. That means if the collateral isn’t sufficient to pay the debt plus the cost of recovering the debt, the remainder is still owed by the borrower.

The unstructured HECM offers a tremendous advantage. Because it is insured with the federal government through the Federal Housing Administration, both the lender and the borrower have security. If the debt exceeds the fair market value for the home at the time of sale, the insurance pays the difference. The borrower (or their heirs) can’t be “underwater” with a Home Equity Conversion Mortgage. No one can owe more than the house sells for. It is a “non-recourse” loan.

The FHA insurance also protects the credit line, assuring the money will be there even if the lender goes out of business, the home goes down in value, or the borrower has unrelated credit problems. A HECM credit line is as secure as money in the bank.

Incredibly, with a HECM, the available credit line also grows, compounding monthly based on the cost of borrowing (at the same adjustable rate as is charged on the debt). This cost-of-living adjuster rewards prudence and long term planning.

Of course, there are advantages as well as disadvantages to either structured or unstructured debt. A rigid framework can offer benefits. Flexibility can be attractive. One becomes more beneficial than another depending on your situation and what you are trying to achieve. That is why this or any large financial decision should be made in collaboration with a qualified financial professional.

Passing thought: “Money often costs too much.” – Ralph Waldo Emerson

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About the author

Scott Funk has specialized in Home Equity Conversion Mortgage reverse mortgages for over a decade. He is a recognized Aging in Place advocate in his home state of Vermont. His monthly newspaper column Aging in Place has run for 7 years in 24 papers around the state. Scott is brings a lighthearted approach to his talks on Boomers, retirement and aging on purpose.

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