What Is a Home Equity Conversion Mortgage (HECM)?
A home equity conversion mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA) Home equity conversion mortgages allow seniors to convert the equity in their home into cash.
The amount that may be borrowed is based on the appraised value of the home (and is subject to FHA limits). Borrowers must also be at least 62 years old. Money is advanced against the value of the equity in the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the loan must be repaid entirely.
- A home equity conversion mortgage (HECM) is a type of reverse mortgage that is Federal Housing Administration (FHA) insured.
- HECMs make up the majority of the reverse mortgage market.
- HECM terms are often better than those of private reverse mortgages, but the loan amount is fixed, and mortgage insurance premiums are required.
How a Home Equity Conversion Mortgage Works
Home equity conversion mortgages are a popular type of reverse mortgage; in fact, they make up the bulk of the reverse mortgage market. Generally, reverse mortgage terms can vary with privately sponsored reverse mortgage products—officially known as proprietary reverse mortgages—potentially allowing for higher borrowing amounts with lower costs than HECMs. HECMs, however, will typically offer lower interest rates for borrowers. The economics of a HECM—versus a privately sponsored reverse mortgage—will depend on the borrower’s age and how long the borrower expects to live or own the home. Many types of reverse mortgages will exclusively target seniors with no requirements for repayment until the borrower sells their home or dies.
A HECM can also be considered in comparison to a home equity loan. A home equity loan is not dissimilar to a reverse mortgage, since borrowers are issued a cash advance based on the equity value of their home, which acts as collateral. However, with a home equity loan, the funds have to be paid back, usually in steady monthly interest payments shortly after the funds are disbursed.
The maximum HECM loan limit in 2020, up from $726,525 in 2019
While HECM loans do not require borrowers to make monthly payments, certain fees are associated with the closing and servicing of the loan. Borrowers also have to pay mortgage insurance premiums.
Who is Eligible for a Home Equity Conversion Mortgage—HECM?
The Federal Housing Administration sponsors the home equity conversion mortgage and provides insurance on the products. The FHA also sets the guidelines and eligibility for these loans. Borrowers can only obtain HECMs from banks where the FHA sponsors the product. To obtain a home equity conversion mortgage a borrower must complete a standard application.
To obtain approval a borrower must meet all of the requirements set by the FHA. They must:
- Be 62 years of age or older
- Own the property outright or paid-down a considerable amount
- Occupy the property as your principal residence
- Not be delinquent on any federal debt
- Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
- Participate in a consumer information session given by a Housing and Urban Development-approved HECM counselor
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development (HUD).
In addition, the property must be a
- Single family home or two- to four-unit home with one unit occupied by the borrower or
- HUD-approved condominium project or
- Manufactured home that meets FHA requirements