What is a Home Equity Conversion Mortgage (HECM)?
A FHA-insured home equity conversion mortgage (HECM) is a reverse mortgage. Seniors can cash out their home equity with home equity conversion mortgages.
Your home’s assessed value determines the amount you may borrow, subject to FHA regulations. Borrowers must be 62 or older. Loans are based on home equity. No payments are due until the home is sold, the borrower(s) dies, or they move out. At that point, the loan must be returned in full.
Home equity conversion mortgages
Home equity conversion mortgages dominate the reverse mortgage industry. Privately sponsored or proprietary reverse mortgages may provide higher borrowing levels with lower expenses than HECMs.
Borrowers usually pay lower interest rates on HECMs. The borrower’s age and expected house ownership time will determine the economics of an HECM versus a privately funded reverse mortgage. Many reverse mortgages are only for seniors, and payments are not required until they sell or die.
Consider comparing a HECM to a home equity loan. Borrowers receive a cash advance based on their home’s equity, which functions as collateral, like a reverse mortgage. In contrast, a home equity loan requires regular monthly interest payments quickly after disbursement.
HECM loans do not require monthly payments; however, closing and servicing costs apply. Borrowers also pay mortgage insurance. Rolling premiums and fees into the loan reduces the net principal limit, the amount of equity available to the borrower.
Who can get a HECM?
The FHA supports and ensures home equity conversion mortgages. The FHA regulates loan eligibility and criteria. HECMs are only available from FHA-sponsored institutions. A typical application is required for a home equity conversion mortgage.
Borrowers must fulfill all FHA standards to get approved. They must:
- Age 62 or older
- Own the property or pay down a lot
- Make it their main home.
- Not have federal debt arrears.
- Have the means to pay property taxes, insurance, homeowner association fees, etc.
- Attend a HUD-approved HECM counselor’s consumer education session.
Mortgage loan discrimination is unlawful. You can take action if you feel discriminated against due to race, religion, sex, marital status, national origin, handicap, or age. Submit a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development.
The property must also be one of these:
- Single-family or two- to four-unit house with borrower-occupied unit
- HUD- or FHA-approved condo
- FHA-approved prefabricated house
How are HECMs and reverse mortgages different?
All HECMs are reverse mortgages, but not all are. HECMs provide FHA-backed reverse mortgages from FHA-approved lenders.
Can you lose your home to HECM?
You can lose your property in various ways with a HECM reverse mortgage. Your HECM balance becomes due if you don’t maintain the property or pay taxes and insurance. The balance is owed if the property has not been your principal home for 12 months. Suppose you can’t pay your reverse mortgage. In that case, you might lose your house even if you leave it involuntarily after an extended stay in a hospital, nursing home, or assisted living facility.
Are HECMs costly?
Indeed, HECMs have substantial origination, mortgage insurance, and maintenance costs.
What are good HECM alternatives?
There are various viable alternatives to HECMs, depending on your scenario. Single-purpose reverse mortgages from local nonprofits are cheaper. Downsizing your house may eliminate the requirement for a HECM, allowing you to give it to your heirs or a charity of your choosing.
The Verdict
A home equity conversion mortgage (HECM) is the most frequent reverse mortgage. It lets senior borrowers use their home equity without paying it back until they die or relocate. For those who don’t qualify for a single-purpose reverse mortgage through a local nonprofit or government body and don’t need to borrow over HUD limitations, the HECM is the best option.
Conclusion
- HECMs are FHA-insured reverse mortgages.
- Most reverse mortgages are HECMs.
- Although HECM terms are frequently better than proprietary reverse mortgages, they have a restricted loan amount and require mortgage insurance fees.
