The Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage which allows older homeowners (aged 62+) to access their home equity without having to move. This program was established to allow senior citizens to tap into their home equity to help supplement their income. Eligible homeowners may take out an HECM in the form of a lump sum of money, line of credit, or monthly payments.
The Home Equity Conversion Mortgage is offered by the U.S. Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). These agencies do not actually issue loans, but instead provide government backing on loans made by FHA-approved lenders.
To qualify for a Home Equity Conversion Mortgage, you must meet the age requirement and own your home outright (or have a low mortgage balance which can be paid-off with the proceeds from reverse mortgage closing). The property in which the home equity is utilized must be the principal residence of the qualifying homeowner. An HECM can also be used to purchase a new residence ― provided that the borrower meets the proper guidelines and has enough cash available to cover the costs (e.g., the difference between the new home’s sales price and the HECM balance, and closing costs).
An HECM basically reverses the flow of payments so that the lender is paying the borrower. The borrower is not required to repay the loan until he/she moves out of the home or passes away. If the borrower sells the home or vacates for any reason, the Home Equity Conversion Mortgage becomes due and must be paid (along with accrued interest and mortgage insurance). Should the sale of the home result in an overage, the extra funds are paid to the borrower or his/her estate.
While HECM loan balances may vary, the maximum amount you can get will be based on your age, the mortgage rate, and the level of your home equity. In most cases, the mortgage on your residence must be completely paid-off or have only a small balance remaining (that can be settled at closing). [See related article “How to Calculate Your Home Equity”]
There are several different payment options for the Home Equity Conversion Mortgage, including the following:
- Tenure ― A monthly stipend for life
- Term ― A monthly stipend for a set period of time (stipulated by the borrower)
- Line of Credit ― Tap funds as needed (up to a certain limit)
- Modified Tenure ― Combines “tenure” and “line of credit” options
- Modified Term ― Combines “term” and “line of credit” options
Keep in mind, if you decide to choose a Home Equity Conversion Mortgage, you will need to pay for FHA mortgage insurance ―this includes a one-time upfront premium (currently 2.0% of the home’s value) plus a monthly premium (currently 0.5% of the loan balance).
It’s also important to note that homeowners who wish to take advantage of the HECM are required to go through HUD-approved counseling to understand the reverse mortgage program, home equity debt, and loan application.