Home Equity Conversion Mortgage (HECM)

A home equity conversion mortgage (HECM) is a type of Federal Housing Administration (FHA) insured reverse mortgage. Home equity conversion mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the equity in the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the loan must be repaid entirely.

Home equity conversion mortgages are a popular type of reverse mortgage and can be compared to other privately sponsored reverse mortgage products offered by banks. Generally reverse mortgage terms can vary with privately sponsored reverse mortgage products potentially allowing for higher borrowing amounts with lower costs than HECMs. HECMs however will typically offer lower interest rates for borrowers. The economics of a HECM versus a privately sponsored reverse mortgage will depend on the borrower’s age and how long the borrower expects to live or own the home. Many types of reverse mortgages will exclusively target seniors with no requirements for repayment until the borrower sells their home or dies.

A HECM can also be considered in comparison to a home equity loan. A home equity loan is also a type of reverse mortgage since borrowers are issued a cash advance based on the equity value of mortgage collateral. A home equity loan will have standard borrowing terms including steady monthly interest payments.

The Federal Housing Administration sponsors the home equity conversion mortgage and provides insurance on the products. The FHA also sets the guidelines and eligibility for these loans. Borrowers can only obtain HECMs from banks where the FHA sponsors the product. To obtain a home equity conversion mortgage a borrower must complete a standard application providing required information.

To obtain approval a borrower must meet all of the product’s requirements. Requirements will be based on the borrower’s profile, their financial situation and the collateral value of the property. A borrower must be 62 years old with a qualifying property that has been substantially paid off with significant equity available. While HECM loans do not require borrowers to make monthly payments certain fees are associated with the loan closing and servicing of the loan.