Financial Planner's Guide to the FHA Insured Home Equity Conversion Mortgage

Skarr, Douglas
May 2008
Journal of Financial Planning;May2008, Vol. 21 Issue 5, p68
Academic Journal
• Reverse mortgages have been highly marketed and promoted over the past few years, with the dominant product being the Federal Housing Administration's home equity conversion mortgage, or HECM. • The majority of information on the HECM has bypassed the financial planning community, with AARP, the FHA, and the Federal National Mortgage Association (FNMA) focusing their consumer education and marketing materials on seniors. Mortgage lenders have used this generic information to furnish the public with a general but incomplete view of the HECM product. The shortage of expert analytical presentations has limited the opportunity of many financial advisors to fully appraise, and adequately explain, this financial planning option. • This article is designed to help financial advisors thoroughly understand the mechanics of the HECM, compare it with other retirement options such as a home equity line of credit, and determine if the HECM should be considered as a component within a client's long-term financial plan. • This article provides an in-depth review of the main formulas and variables that make up the HECM. Through a series of cash-flow illustrations, it presents the costs and benefits of using various home-equity based strategies to increase cash flow in retirement. Particular attention is paid to the client's risk tolerance and personal preferences. • A sidebar is included that lists important HECM program information regarding eligibility, limitations, requirements, and costs.


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