Table of Contents
- What Is a Home Equity Conversion Mortgage (HECM)?
- Key Takeaways
- How a Home Equity Conversion Mortgage Works
- Mortgage Insurance Premiums
- Traditional Fixed-Rate Mortgage vs. Reverse Mortgage
- Proprietary Reverse Mortgages
- Who Is Eligible for a Home Equity Conversion Mortgage (HECM)?
- Frequently Asked Questions
- The Bottom Line
What Is a Home Equity Conversion Mortgage (HECM)?
Let me explain what a Home Equity Conversion Mortgage, or HECM, really is. It's a type of reverse mortgage designed for seniors who are 62 or older, letting you turn the equity in your home into cash that you can use for expenses, boosting your retirement income, or even fixing up your house.
The amount you can borrow depends on your home's appraised value, and it's backed by the Federal Housing Administration (FHA). Unlike a regular mortgage where you make monthly payments, with an HECM, you don't repay anything monthly. You only settle the loan when you sell the home, or if you or any co-borrower passes away or moves out.
In exchange, you pay fees and interest on the balance to the lender. Remember, you still have to keep up with home maintenance, property taxes, and insurance. I'll walk you through how this all operates and what you need to qualify.
Key Takeaways
An HECM is essentially a reverse mortgage for homeowners 62 and up to convert equity into income. You can use the money however you want, like for daily expenses or repairs. No monthly repayments are needed; pay back when the home is sold or you're gone. These make up most reverse mortgages and are FHA-insured. But you do pay interest, fees, and insurance premiums.
How a Home Equity Conversion Mortgage Works
HECMs are the dominant player in reverse mortgages. They're similar to home equity loans in that you get cash based on your home's equity, which secures the loan. But with a standard equity loan, you start repaying monthly right away.
With an HECM, no monthly payments from you—instead, the loan comes due when you sell or die. The lender gets closing costs, interest, and servicing fees in return.
You can get the funds in different ways, and that affects if you get a fixed or adjustable interest rate. Adjustable rates change with the market.
How HECM Funds Are Disbursed
- Lump sum: Get all approved equity as one upfront cash payment, with a fixed interest rate, but it might cost more since interest accrues on everything immediately.
- Credit line: Draw from it as needed, with an adjustable rate; cheaper because interest only on what you use; can pair with monthly payouts.
- Monthly payouts: Fixed monthly income, adjustable rate; combine with a credit line; interest only on withdrawn amounts, so lower cost than lump sum.
Mortgage Insurance Premiums
You also pay mortgage insurance premiums for an HECM. These can be added to the loan, but that means less equity for you to access—it's called the net principal limit.
Traditional Fixed-Rate Mortgage vs. Reverse Mortgage
In a traditional mortgage, you're 18 or older, borrow to buy a home, pay the lender monthly, and the balance decreases over time. With a reverse mortgage like HECM, you're 62+, funds come from your equity, lender pays you, balance increases, and payoff happens at sale, move, or death. You still handle taxes and insurance in both.
Proprietary Reverse Mortgages
There are private reverse mortgages not backed by FHA, which might let you borrow more with lower costs, but HECMs often have better rates. Your choice depends on your age and how long you'll stay in the home. Some types let you stay without repaying until sale or death.
Who Is Eligible for a Home Equity Conversion Mortgage (HECM)?
The FHA sets the rules for HECMs. You get them from FHA-approved lenders like banks or credit unions, via a standard application.
To qualify, you must be at least 62, own the property or have paid down a lot, use it as your main home, not owe federal debt, afford ongoing costs like taxes and insurance, and attend a HUD-approved counseling session. The property has to be a single-family home, certain multi-unit, approved condo, or FHA-compliant manufactured home.
Frequently Asked Questions
What's the difference between a HECM and a reverse mortgage? All HECMs are reverse mortgages, but not vice versa; HECMs are FHA-backed.
Can you lose your home with a HECM? Yes, if you don't maintain it, pay taxes/insurance, or if it's not your primary residence for over 12 months, or after a long hospital stay.
Are HECMs expensive? They have high origination fees, insurance premiums, and maintenance costs.
What are alternatives? Single-purpose reverse mortgages from nonprofits are cheaper if you qualify; or downsize to free up cash without a loan.
The Bottom Line
An HECM is the go-to reverse mortgage for those 62 and up to access home equity without repayments until you leave or pass. You get funds as lump sum, monthly, or line of credit, but fees and interest eat into equity. Talk to a mortgage pro to see if it fits your situation.
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