What is a home equity conversion mortgage (HECM)?
A home equity conversion mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA) Home equity conversion mortgages allow seniors to convert their home equity into cash.
The amount that can be borrowed is based on the expertise value from home (and is subject to FHA limits). Borrowers must also be at least 62 years old. The money is advanced against the equity value of the home. Interest accrues on the outstanding loan balance, but no payment is due until the home is sold or the borrower (s) die, at which time the loan must be fully repaid.
Key points to remember
- A home equity conversion mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA).
- HECMs make up the majority of the reverse mortgage market.
- The terms of HECM are often better than those of private reverse mortgages, but the loan amount is fixed and mortgage loan insurance premiums are required.
How a home equity conversion mortgage works
Home equity conversion mortgages are a popular type of reverse mortgage; in fact, they make up the bulk of the reverse mortgage market. Generally, reverse mortgage terms can vary with privately sponsored reverse mortgage products, officially known as exclusive reverse mortgages—Potentially allowing higher loan amounts with lower costs than HECMs.
HECMs, however, generally offer lower interest rates for borrowers. The economics of an HECM – compared to a privately sponsored reverse mortgage – will depend on the age of the borrower and how long the borrower expects to live or own the home. Many types of reverse mortgages will exclusively target seniors with no repayment obligation until the borrower sells their home or passes away.
A HECM can also be considered in relation to a home equity to lend. A home equity loan is no different from a reverse mortgage, as borrowers receive a cash advance based on the equity in their home, which serves as collateral. However, with a home equity loan, the funds must be repaid, usually in the form of regular monthly interest payments shortly after the funds are disbursed.
The maximum HECM loan limit in 2020, compared to $ 726,525 in 2019
Although HECM loans do not require borrowers to make monthly payments, there are some fees associated with closing and servicing the loan. Borrowers also have to pay mortgage insurance premiums.
Who is eligible for a Home Equity Conversion Mortgage – HECM?
The Federal Housing Administration sponsors the home equity conversion mortgage and provides product insurance. The FHA also sets the guidelines and eligibility for these loans. Borrowers can only get HECMs from banks where the FHA sponsors the product. To get a home equity conversion mortgage, a borrower must complete a standard application.
To get approval, a borrower must meet all the requirements set by the FHA. They must:
- Be 62 years of age or older
- Own the property directly or repay a considerable amount
- Occupy the property as a main residence
- Not be past due on any federal debt
- Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance, homeowners association fees, etc.
- Participate in a consumer information session given by an HECM approved Housing and Urban Planning advisor
In addition, the asset must be one of the following:
- Single-family home or house with two to four units with a dwelling occupied by the borrower
- HUD Approved Condominium Project
- Prefabricated house meets FHA requirements