What is a Home Equity Conversion Mortgage (HECM)? Explained: How It Works, Eligibility, and Pros & Cons
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Summary:
A home equity conversion mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA) that allows seniors to convert the equity in their homes into cash without making monthly payments. This article explores how a home equity conversion mortgage works, who is eligible for it, differences between HECMs and other reverse mortgages, potential risks of HECMs, and alternatives. Discover if an HECM is the right financial option for you.
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What is a home equity conversion mortgage (HECM)?
A home equity conversion mortgage (HECM) is a specialized type of reverse mortgage, backed by the Federal Housing Administration (FHA), designed to help seniors unlock the equity in their homes. Unlike traditional mortgages, with an HECM, borrowers receive cash based on the appraised value of their home, and they are not required to make monthly payments. Instead, the loan is typically repaid when the home is sold, the borrower(s) pass away, or they move out of the property.
How a home equity conversion mortgage works
HECMs are the most prevalent form of reverse mortgages and offer several advantages. They often come with lower interest rates compared to proprietary reverse mortgages, which can result in lower overall costs for borrowers. The suitability of an HECM versus a proprietary reverse mortgage depends on factors such as the borrower’s age and how long they plan to remain in their home.
Compared to traditional home equity loans, where borrowers must make monthly payments, HECMs do not require such payments. However, borrowers should be aware of associated fees, including mortgage insurance premiums, which can be rolled into the loan but reduce the available equity.
Who is eligible for a home equity conversion mortgage (HECM)?
To be eligible for an HECM, borrowers must meet specific criteria set by the FHA:
- Be at least 62 years old
- Own the property or have a substantial amount of equity
- Use the property as their primary residence
- Not be delinquent on federal debt
- Have the financial capacity to cover ongoing property expenses
- Participate in a consumer information session with an approved HECM counselor
In addition to these requirements, the property itself must meet certain criteria, such as being a single-family home or a HUD-approved condominium.
Frequently asked questions
What is the difference between a HECM and a reverse mortgage?
All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. HECMs are specifically backed by the FHA and are available through FHA-approved lenders, offering certain benefits like lower interest rates and increased consumer protections.
Can you lose your home with a HECM?
Yes, there are scenarios where a borrower could lose their home with an HECM. Failure to maintain the property, pay property taxes and insurance, or no longer using the home as a primary residence for an extended period could trigger the loan balance to become due. Even involuntary stays in hospitals or assisted living facilities can lead to the loss of the home if the borrower cannot cover the reverse mortgage balance.
Are HECMs expensive?
HECMs come with high origination costs, mortgage insurance premiums, and maintenance fees. These expenses can affect the net principal limit, reducing the available equity that borrowers can access.
What are good alternatives to an HECM?
Several alternatives to HECMs exist, depending on individual circumstances. For those who qualify, single-purpose reverse mortgages offered by local nonprofits can be more cost-effective. Downsizing the home may also eliminate the need for additional income through an HECM, allowing homeowners to pass on their property to heirs or donate it to charity.
Is there an age requirement for HECM eligibility?
Yes, borrowers must be at least 62 years old to qualify for a home equity conversion mortgage (HECM).
Do HECMs require monthly payments?
No, HECMs do not require borrowers to make monthly payments. Instead, the loan is typically repaid when the home is sold, the borrower(s) pass away, or they move out of the property.
Key takeaways
- A home equity conversion mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA) that allows seniors aged 62 and older to convert their home equity into cash without making monthly payments.
- HECMs offer lower interest rates than some proprietary reverse mortgages, making them an attractive option for many borrowers.
- Eligibility for an HECM is based on age, property ownership, and financial capability, among other criteria.
- HECMs come with high upfront costs, including origination fees and mortgage insurance premiums, which can reduce the available equity.
- Alternatives to HECMs include single-purpose reverse mortgages and downsizing one’s home, depending on individual financial goals and circumstances.
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