Home Equity Conversion Mortgage (HECM): What To Know
A home equity conversion mortgage (HECM) is a federally insured reverse mortgage that allows you to receive a cash payment from your home equity every month, using your home as collateral.
HECMs are backed by the U.S. Department of Housing and Urban Development (HUD). The cash you receive is typically tax-free and you can use it for any purpose. Still, getting one can be complicated, and isn’t the best choice for everyone. There are qualification requirements, limits and fees that can add up quickly.
How does a HECM work?
A HECM can supplement your income during retirement. Whether you want to vacation in Bermuda or need to pay for medical treatments, a HECM could provide a large loan amount for you to work with.
In a HECM, you apply for the loan, talk with a HUD-approved counselor and receive an offer.
The amount you can borrow depends on the age of both you and your spouse — even if they aren’t on the loan — as well as current interest rates, your home’s appraised value and current FHA mortgage limits.
What is the difference between a HECM and a reverse mortgage?
A HECM is a type of reverse mortgage. It’s differentiated by the fact that it’s insured by HUD and must follow regulations set by the Federal Housing Administration (FHA).
Is a HECM a second mortgage?
Yes, a HECM — and all types of reverse mortgages — are second mortgages. In a second mortgage, the lender places a claim against the equity in your house (which acts as collateral), and this loan takes second position after a first or “forward” mortgage.
What is a HECM purchase?
A HECM purchase is when you use the funds from a HECM loan to buy a new primary residence. A HECM purchase is when you use the funds from a HECM loan to buy a new primary residence. Depending on the HECM, you could repay the loan with a lump sum payment, by refinancing the HECM loan or selecting a flexible repayment option.
Who is eligible for a HECM?
To get a HECM loan, you and your home must meet HUD requirements.
Borrower eligibility
Borrowers must meet the following requirements to be eligible for a HECM:
- Be 62 years of age or older
- Have significant equity in your home
- Use the home as your principal residence
- Not be delinquent on any federal debt
- Be able to cover property taxes, insurance, homeowner association fees and other potential charges, for the ongoing future
- Attend a session with a HUD-approved HECM counselor
Property eligibility
In addition, your property must also meet the following requirements. It must be:
- A single-family home or a multifamily property occupied by the borrower
- An FHA single-unit-approved individual condominium or a unit in a HUD-approved condominium development
- A manufactured home that meets FHA requirements
Who shouldn’t take out a reverse mortgage?
You shouldn’t take out a reverse mortgage if you only want to borrow a small amount, don’t meet the age requirement or plan to stay in your home for only a short amount of time.
How do you apply for a HECM?
- Identify HUD-approved lenders. Use HUD’s lender list tool to find a lender. You only need to select your state and the HECM option as the “service-originator type.” You could also search by lender name and a more specific area, such as a radius around a city or county.
- Research the lenders. Google the name of each of the lenders you find on the HUD list for your area. Look at what they offer, browse consumer reviews and check out any complaints filed against them on the Consumer Financial Protection Bureau database.
- Contact a couple lenders. Many HECM lenders don’t allow you to apply directly on their website. Instead, you can fill out a form for them to contact you.
- Apply with a lender or two. The lender will ensure that you meet the basic requirements to officially apply for a HECM and then guide you through the process. You could communicate with a mortgage planner over the phone, via email or in person.
- Attend a counseling session. As part of your application, you must attend a pre-purchase counseling session with a HUD-approved counselor — they can clarify your financial plan, give advice and connect you to additional resources.
- Review and select an offer. Review any offer(s) you receive, choose the best HECM and sign on the dotted line.
To pick the best HECM loan offer, consider:
- The costs. Look at both upfront costs and charges over the life of the loan. Costs will include an origination fee, servicing fees, a mortgage insurance premium and third-party charges, such as title search and inspection fees.
- How you’ll receive the money. Do you want a lump sum, monthly payment or line of credit? Some lenders allow you to pay a fee to later change how you receive funds.
- How you can repay the loan. You can repay the loan in full, in a lump sum by pulling assets to pay the amount in cash or by refinancing the HECM loan.
What are the pros and cons of a HECM?
HECM pros
- You can have a steady stream of income for years without moving out of your home
- The income from a reverse mortgage is tax-free
- HECM income won’t alter your Social Security or Medicare benefits
- You can pull large loan advances
- A HECM’s total loan costs are typically lower than proprietary loan costs
HECM cons
- You or your heirs could lose the home if the loan isn’t repaid
- Upfront costs can be high
- Servicing fees and mortgage insurance premiums are charged over the life of the loan
- Your interest fees grow as you borrow more
- The interest isn’t tax-deductible until you pay off the loan
- Most HECMs have variable rates — your interest rate can go up
How can you repay a HECM?
Full repayment on a reverse mortgage is due when the home is no longer the borrower’s principal residence. This typically happens when the homeowner dies, sells the home or moves away. You may also have to repay a HECM if you fail to make the necessary tax and insurance payments and/or fail to do necessary home maintenance.
To repay the HECM, you could cash out assets, refinance the reverse mortgage (into either another reverse mortgage or a conventional loan) or sell your home. Whatever you choose, you’re legally protected — to pay off the loan, you’ll generally never have to pay more than your home’s appraised value. Here’s more on how to get out of a reverse mortgage.