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 homes 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, the borrower(s) dies, or the borrower(s) moves out of the property at which point the loan must be repaid entirely.
- Home equity conversion mortgages (HECMs) are reverse mortgages insured by the Federal Housing Administration (FHA).
- HECMs make up the majority of the reverse mortgage market.
- HECM terms are often better than those of proprietary reverse mortgages, but the maximum loan amount is limited, and mortgage insurance premiums are required.
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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 in 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 2022, up from $822,375 in 2021.
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. Although these premiums and fees can be rolled into the loan, this lowers the amount of equity a borrower can tap, referred to as the net principal limit.
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 at least 62 years old
- Own the property or have paid down a considerable amount
- Use the property as their principal residence
- Not be delinquent on any federal debt
- Have the financial capability to continue to make timely payments of ongoing property charges such as property taxes, insurance, homeowner association fees, etc.
- Participate in a consumer information session provided 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 or with the U.S. Department of Housing and Urban Development (HUD).
In addition, the property must be one of the following:
- A single-family home or two- to four-unit home with one unit occupied by the borrower
- A HUD- or FHA-approved condominium
- A manufactured home that meets FHA requirements
What Is the Difference Between a HECM and a Reverse Mortgage?
All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. HECMs are reverse mortgages backed by the FHA and issued by an FHA-approved lender.
Can You Lose Your Home with a HECM?
Yes, you can lose your home several ways with a HECM reverse mortgage. If you fail to keep the property in good repair or pay property taxes and insurance, your HECM balance becomes due. If the property stops being your primary residence for more than 12 consecutive months, the balance becomes due. Even if you leave your home involuntarily because of a lengthy stay in a hospital, nursing home, or assisted living facility, you could lose your home if you can't afford to pay the balance on your reverse mortgage.
Are HECMs Expensive?
Yes, HECMs carry very high origination, mortgage insurance premiums, and maintenance fees.
What Are Good Alternatives to an HECM?
There are several good alternatives to an HECM depending on your situation. If you can qualify for a single-purpose reverse mortgage through a local nonprofit, those are usually much cheaper. If you can downsize your home, you may not need the extra income from a HECM and will then be able to pass on your home to your heirs or leave it to the charity of your choice when you pass.
The Bottom Line
A home equity conversion mortgage (HECM) is the most common type of reverse mortgage. It allows older borrowers to tap the equity in their homes without having to pay it back until they pass or move. If borrowers don't need to borrow above the HUD limits for a proprietary reverse mortgage, and they don't qualify for a single-purpose reverse mortgage through a local nonprofit or government entity, then the HECM is their most logical choice.