Understand what is a home equity conversion mortgage

Reverse mortgages are becoming popular with seniors above 62 years who have sufficient equity in their homes. The loan type is a good way to supplement an existing income. One such type of reverse mortgage that’s insured by the U.S. Federal Government is a Home Equity Conversion Mortgage (HECM). But, what is a home equity conversion mortgage?

The HECM is a reverse mortgage program that’s available only through the Federal Housing Administration or an FHA-approved lender. It enables senior homeowners to withdraw a part of their home’s equity as cash or a credit line. 

That way, they can buy a new home – completing both the purchase of a home and reverse mortgage transaction with one closing cost. 

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What is Home Equity Conversion Mortgage aka HECM?

HECM is a reverse mortgage program sponsored by the Federal Housing Administration. It allows you to withdraw a portion of the equity in your home, whether as a fixed monthly amount or a line of credit. Or, the loan proceeds can be in the form of a combination of the two. 

You can utilize a HECM to buy a primary residence if you’re able to pay the difference between the HECM proceeds and the home sales price along with the closing costs.

What is the HECM eligibility?

Any senior house owner having tappable home equity may apply for HECM. 

They must:

• Be at least 62 years old or older.
• Own the house outright. Or, with a small mortgage balance.
• Live in the house and consider it as their principal residence.
• Should not have any federal debt.
• Be willing to meet an approved HECM counselor to originate the loan.

Which type of property is eligible for HECM?

The houses that can qualify for an FHA-sponsored reverse mortgage must meet all the property standards and flood requirements. These include:

• Single-family homes or 1-4 unit homes out of which one unit should be occupied by the money borrower.
• Condominiums that are approved by the U.S. Department of Housing and Urban Development or HUD.
• Manufactured homes that adhere to the FHA standards.

What’s the difference between HECM and a reverse mortgage?

All reverse mortgages are HECMs. However, not all HECMs are reverse mortgages. HECMs are reverse mortgages that are provided by lenders with FHA approval. On the other hand, reverse mortgages can be privately sponsored – with varying mortgage terms and conditions, higher borrowing amounts, and lower costs than HECMs.

The similarity between the two is that both types of reverse mortgages have no requirements for repayment until the borrower sells their home or dies.

How does a home equity conversion mortgage work?

Home equity conversion mortgages are one of the most popular financial products in the reverse mortgage market. HECMs typically offer lower interest rates for borrowers than proprietary reverse mortgages. Of course, the rate will depend on the borrower’s age and the time period the borrower expects to own the house. 

Having said that, a fixed-rate HECM is more advantageous than an adjustable-rate HECM. The latter may fluctuate throughout the life of the loan. 

HECM is quite similar to a home equity loan since borrowers have access to cash based on the equity value of their home aka the collateral. The difference is that with a home equity loan, the money has to be paid back, usually as monthly payments.

HECM loan does not require borrowers to make monthly interest payments. But, it has high loan origination fees as well as maintenance fees. Additionally, the borrower has to pay mortgage insurance premiums. 

Could you lose your home with HECM?

Yes, you could lose your home with a HECM reverse mortgage. For example, if you do not keep the property in good condition or fail to pay property taxes and insurance. Or, if the real estate is not your primary residence for more than 12 consecutive months. Unfortunately, if you leave your home involuntarily due to a lengthy stay in a hospital, nursing home, or assisted living facility and can’t afford to pay the balance on your reverse mortgage, you could lose your home.

Last thoughts

We’re sure now you know what is a home equity conversion mortgage. This type of FHA-insured reverse mortgage allows older U.S. citizens to tap into the equity in their homes and borrow money. This arrangement works until they pass or move. Till then, they can utilize the funds to buy a home, consolidate debts, or pay for emergencies – just like a traditional mortgage. 

To sum up, HECM allows seniors to convert the equity in their houses into cash without having to sell their property. The loan amount that can be borrowed is determined by the home’s appraisal value and equity. And, is subject to FHA limits. 

While the interest is accrued on the outstanding loan balance, there is no requirement for monthly payments – until the house is sold, the borrower passes away, or vacates the property. At this time, the loan must be fully paid back. Simply put, the borrower doesn’t have to pay back the loan as long as they continue to live in the principal residence for the most part of the year. 

Therefore, the HECM program helps seniors achieve their financial goals and supplement their retirement income. It’s the most logical choice for someone who doesn’t require to borrow above the HUD limits or doesn’t qualify for a single-purpose reverse mortgage through a local nonprofit or government entity.

Written by Ramona Sinha. September 28, 2022

Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.