As with any home mortgage loan, there are closing costs, and the borrower must eventually repay the borrowed amount, plus interest and fees. However, several powerful HECM features make it a unique option to consolidate debt in retirement.
- Eliminate monthly mortgage payments while owning the home
- Consolidate other debts
- Flexible payment to or from the borrower
- Shift mortgage debt from the homeowner to the home
- Safeguard heirs
Borrowers can use HECM loan proceeds to consolidate other debts (high interest credit cards, auto loans etc.), freeing them of the burden of those required monthly principal and interest (P&I) payments. So long as they meet the HECM loan terms, which include living in the home as the primary residence and paying property related charges like taxes and insurance, borrowers can continue to defer repayment of the loan balance. That can be a real game changer for your retirement cash flow strategy.
As a HECM is a mortgage loan, it shouldn’t be viewed as free money to apply toward debts. However, if the HECM frees up enough cash to enable the homeowner to settle their debts, or at least make those debts manageable, it can greatly benefit the borrower. As the home sale typically pays the HECM loan balance once it matures, consolidating debt with a HECM is akin to shifting debt from the homeowner’s monthly cash flow to the home itself.
Another major difference between using a HECM to consolidate debt and a traditional loan product is the potential impact to heirs. As HECMs are non-recourse loans, the borrower will never have to pay out of pocket to satisfy the HECM because the home stands for the debt.
Pros of Using a HECM to Consolidate Debt
- The borrower retains full ownership of the home
- The borrower can pay off creditors, potentially increasing their monthly cash flow for the things they need or want thanks to the flexible repayment feature
- Homeowners can eliminate obligatory monthly mortgage payments (must still pay property charges like taxes, homeowner’s insurance and home upkeep)
- If the homeowner’s mortgage payments are highly burdensome, the above feature can be incredibly useful for managing debt and increasing cash flow
- Flexibility for the homeowner to tailor their loan payout (if applicable) to best tackle their debt
- The home stands for the debt, protecting the borrower and heirs from personal liability for payment due to the loan’s non-recourse feature
Cons of Using a HECM to Consolidate Debt
- The unpaid reverse mortgage loan balance grows over time as interest and fees get added to the unpaid loan balance. Most other types of loans require monthly P&I payments, which decrease the loan balance over time and thus reduces your borrowing costs. Note: With a HECM, you do have the option to pay down the loan balance at any time paying as much or as little as you like
- Fees and closing costs: The upfront costs tend to be higher for a HECM than other types of debt consolidation loans not secured by your home
- You’re drawing down on your home equity, which likely means your heirs will have less money (or no money at all) coming to them from this particular asset. However, by strategically tapping home equity first, you may be able to extend the life of your other productive assets, potentially leading to a greater net worth to leave to your family.
*This article does not constitute tax/financial advice from Fairway. Please consult a tax/financial advisor regarding your specific situation. There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, homeowner’s insurance and maintain the home. Credit subject to age, property and some limited debt qualifications, program rates, fees, terms and conditions are not available in all states and subject to change. Copyright 2023 Fairway Independent Mortgage Corporation (“Fairway”) NMLS 2289, 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-923-4800. All rights reserved. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
