HECM Meaning and Home Equity Conversion Mortgage Details

A Home Equity Conversion Mortgage, or HECM, is a type of reverse mortgage that allows homeowners to borrow money using the equity in their home.

The HECM program is insured by the Federal Housing Administration (FHA), which provides protection for borrowers in case of default.

HECMs are only available to homeowners who are at least 62 years old.

The amount of money a borrower can receive from a HECM is based on the value of their home, their age, and current interest rates.

Consider reading: Does a Heloc Increase Your Mortgage Payment

A Home Equity Conversion Mortgage, or HECM, is a type of reverse mortgage that's insured by the Federal Housing Administration (FHA). HECMs make up the majority of the reverse mortgage market.

Here are some key facts about HECMs:

HECMs typically offer lower interest rates for borrowers, making them a popular choice for seniors looking to tap into their home's equity without having to make monthly payments.

Home equity refers to the value of your home that you've built up over time through mortgage payments and property appreciation. This value can be substantial, and it's what makes a home equity conversion mortgage (HECM) possible.

To qualify for a HECM, you must be at least 62 years old, which is a common requirement for this type of loan. Home equity conversion mortgages are insured by the Federal Housing Administration (FHA), providing an added layer of security for borrowers.

The amount you can borrow with a HECM is based on the appraised value of your home, which is subject to FHA limits. This means that the more valuable your home, the more you can borrow.

Interest accrues on the outstanding loan balance, but you won't have to make any payments until the home is sold, you pass away, or you move out of the property.

A Home Equity Conversion Mortgage, or HECM, is a type of reverse mortgage insured by the Federal Housing Administration (FHA).

It allows seniors to convert the equity in their homes into cash. The amount that may be borrowed is based on the appraised value of the home and is subject to FHA limits.

Borrowers must be at least 62 years old to qualify for a HECM. They must also own the property or have paid down a considerable amount, use the property as their principal residence, and not be delinquent on any federal debt.

The property must be one of the following: a single-family home or two- to four-unit home with one unit occupied by the borrower, a HUD- or FHA-approved condominium, or a manufactured home that meets FHA requirements.

Here are the key characteristics of a HECM:

To qualify for a Home Equity Conversion Mortgage (HECM), you'll need to meet certain eligibility requirements. You must be at least 62 years old, own significant equity in your home, typically at least 50 percent, and have the financial capability to continue making timely payments of ongoing property charges.

Check this out: Can I Sell My House If I Have Equity Release

The property must be your primary residence and meet specific guidelines. It can be a single-family home, a two- to four-unit home with one unit occupied by you, a HUD- or FHA-approved condominium, or a manufactured home that meets FHA requirements.

You'll also need to demonstrate that you have the financial resources to pay for property taxes, insurance, and maintenance. This means you must be current on any federal debt, such as income taxes or student loans.

To give you a better idea of the eligibility requirements, here are the key points:

A reverse mortgage is only available to older homeowners, and it uses your home as collateral to convert some of the equity into cash.

You get to keep the title and stay in the home while using the cash as you wish. This is a big difference from a traditional mortgage, which typically requires monthly payments.

A reverse mortgage doesn't require you to make any payments as long as you live in the home, but it does accrue interest over time.

When you die or leave the home, you or your heirs will be responsible for paying off the loan and interest with cash or by selling the home. This can be a significant financial burden, so it's essential to understand the terms of the loan.

In a Home Equity Conversion Mortgage (HECM), the loan details are crucial to understand. The money from a reverse mortgage can be distributed in several different ways.

You can receive the loan proceeds as a lump sum, in cash, at settlement. This can be a helpful option if you need a large sum of money for a specific purpose, such as paying off debts or covering medical expenses.

Alternatively, you can opt for a Tenure payment, which is a monthly cash payment that continues for as long as you live in the home. This can provide a steady stream of income to help with living expenses.

A line of credit is another option, similar to a home equity line of credit. This allows you to borrow and repay funds as needed, without having to take out a new loan.

You can also choose to receive the loan proceeds as a combination of these options. For example, you might receive a lump sum at settlement and then a monthly Tenure payment for as long as you live in the home.

Here are the different ways you can receive the loan proceeds:

You don't have to make loan payments for as long as you live in the home and reside in it as your primary residence, and you can't repay the loan unless you sell the home, pass away, or permanently move from the property.

Any origination fees or upfront costs that are rolled into the loan will accrue interest over time, and the loan balance is paid off through the sale of your home. If your home sells for more than the loan amount, any remaining equity goes to you or your heirs when you pass.

Most HECMs have adjustable interest rates, which can change monthly or annually based on economic conditions, but lenders set a "cap" that limits rate increases in a given month or year and over the life of the loan. This cap is 2 percent annually and 5 percent over the life of the loan.

Additional reading: Margin Loan vs Heloc

Most HECMs have adjustable interest rates, meaning the rate can change monthly or annually, based on economic conditions. This can be unsettling for some borrowers, but lenders set a "cap" that limits rate increases in a given month or year and over the life of the loan.

HECMs have a 2 percent annual cap and a 5 percent lifetime cap. This means that even if the market interest rate increases significantly, your interest rate won't go up by more than 5 percent over the life of the loan.

Adjustable HECM interest rates include two components: the actual market interest rate plus a margin added by the lender. The margin amount is fixed for the life of the loan.

Reverse mortgage interest rates tend to be a bit higher than rates for home equity loans or home equity lines of credit. This is something to consider when deciding whether a reverse mortgage is right for you.

Repaying a reverse mortgage is a bit unique, as you don't have to make loan payments as long as you live in the home and it's your primary residence. The loan balance will accrue interest over time, though.

Any origination fees or upfront costs rolled into the loan will add to the balance. You only need to repay the loan when you sell the home, pass away, or permanently move from the property.

In most cases, the loan balance is paid off through the sale of your home. If your home sells for more than the loan amount, you or your heirs will get the remaining equity.

The good news is that money received from a reverse mortgage is not taxable and does not directly affect Social Security or Medicare benefits.

However, if you're receiving Medicaid, SSI, or other public benefits, you'll need to use the loan proceeds immediately to avoid counting them as "liquid assets" that could impact your eligibility.

Worth a look: What Is Hecm Benefit

The IRS considers loan advances to be a loan, not income, so you won't have to worry about taxes on the money you receive.

But, if you're on Medicaid, any residual funds remaining in your bank account the following month after receiving a lump sum could count as an asset, potentially making you ineligible for the program.

If you're receiving a lump sum, spending it all in the same calendar month is key to avoiding this issue.

Here's a rough idea of the asset limits for Medicaid: if you're an individual, you can have up to $2,000 in liquid resources, and if you're a couple, you can have up to $3,000.

To be safe, it's a good idea to contact the local Area Agency on Aging or a Medicaid expert to get specific guidance on how a reverse mortgage might affect your eligibility.

You can lose your home with a HECM if you fail to keep the property in good repair or pay property taxes and insurance, or if the property stops being your primary residence for more than 12 consecutive months.

There are several good alternatives to an HECM, including single-purpose reverse mortgages through local nonprofits, which are usually much cheaper. Downsizing your home may also be a viable option if you don't need the extra income from a HECM.

Some alternatives to consider are listed below:

A home equity loan is another option to consider, but it requires you to pay back the funds in steady monthly interest payments, unlike a HECM which doesn't require repayment until the borrower sells their home or dies.

If you pass away, your heirs will need to pay off the loan's balance within six months, though they may be able to get a 90-day extension.

They can choose to sell the property or purchase it for 95 percent of its appraised value.

If you can qualify for a single-purpose reverse mortgage through a local nonprofit, those are usually much cheaper.

Downsizing your home may also be a viable option, allowing you to pass on your home to your heirs or leave it to charity when you pass.

According to the U.S. Department of Housing and Urban Development, the HECM program is just one of the alternatives available.

A single-purpose reverse mortgage can be a cost-effective option, especially if you're working with a local nonprofit.

Losing your home is a real risk with a reverse mortgage, especially if you fail to pay property taxes and insurance or let the property fall into disrepair. If that happens, the balance becomes due.

You could also lose your home if you leave it for more than 12 consecutive months, even if it's just for a hospital stay or a move to a nursing home.

A reverse mortgage can be a significant burden on your home's equity, leaving less for your heirs. In fact, it can deplete the equity you have left to pass on to them.

Scams are also a major concern in the reverse mortgage industry, with the Consumer Financial Protection Bureau taking action against several lenders and servicers in recent years.

If you're a victim of a reverse mortgage scam, you should file a complaint with the CFPB.

Proprietary reverse mortgages are private loans offered by companies that back them. They can be a good option for homeowners with higher-appraised homes, as they may qualify for a bigger loan.

These loans are more expensive than traditional home loans and single-purpose reverse mortgages, and come with higher financing costs. This is something to consider if you plan to stay in your home for a short time or borrow a small amount.

The loan size for proprietary reverse mortgages is determined by the same factors as HECMs, but is limited only by the lender's willingness to take on risk. This can be a drawback for some homeowners.

Additional reading: Fees for Reverse Mortgage