Home Equity Conversion Mortgage: The Standard Reverse Mortgage Option
A Home Equity Conversion Mortgage (HECM) is the most commonly used type of reverse mortgage in the United States. This FHA-insured loan allows homeowners aged 62 and older to convert part of their home equity into cash while retaining ownership and without making monthly mortgage payments.
What Is a Home Equity Conversion Mortgage?
A Home Equity Conversion Mortgage (HECM) represents approximately 90% of all reverse mortgages originated in the United States. These loans are specifically designed for homeowners aged 62 or older who have significant home equity and want to access it without selling their home or making monthly mortgage payments.
Unlike traditional mortgages where borrowers make payments to lenders, HECMs allow homeowners to receive payments from lenders. The loan balance grows over time as interest accrues and is typically repaid when the borrower sells the home, moves out permanently, or passes away. HECMs are insured by the Federal Housing Administration (FHA), providing important protections for both borrowers and lenders.
How HECM Reverse Mortgages Work
HECM reverse mortgages function by converting home equity into accessible funds. The amount available depends on several factors: the age of the youngest borrower, current interest rates, the appraised home value, and FHA lending limits. Generally, older borrowers with more valuable homes can access larger loan amounts.
Before obtaining a HECM, borrowers must complete mandatory counseling with a HUD-approved counselor to ensure they understand the loan terms and obligations. This requirement helps protect seniors from making uninformed financial decisions. Borrowers must also continue paying property taxes, homeowners insurance, and maintain the property in good condition to avoid loan default.
Funds from a HECM can be received in several ways: as a lump sum, monthly payments, a line of credit, or a combination of these options. The line of credit option has become particularly popular as unused funds in the line grow over time, potentially providing access to more money in the future.
HECM Provider Comparison
Several financial institutions offer HECM reverse mortgages, each with varying terms and service levels. American Advisors Group (AAG) is one of the largest reverse mortgage lenders in the country, known for its comprehensive customer service and educational resources. Finance of America Reverse offers both HECM loans and proprietary reverse mortgage products for higher-value homes.
One Reverse Mortgage provides a streamlined online application process, while Liberty Reverse Mortgage emphasizes personalized service with dedicated loan officers throughout the process. For those seeking additional options, National Reverse Mortgage Lenders Association provides resources to find reputable lenders.
| Provider | Notable Features | Customer Support |
|---|---|---|
| AAG | Extensive educational resources | Phone, in-person, online |
| Finance of America Reverse | Proprietary jumbo options | Phone, online |
| One Reverse Mortgage | Streamlined online process | Phone, online |
| Liberty Reverse Mortgage | Personalized service | Phone, in-person |
Benefits and Drawbacks of HECM Reverse Mortgages
HECM reverse mortgages offer several potential benefits for senior homeowners. They eliminate monthly mortgage payments, provide access to home equity without selling, and offer funds that can be used for any purpose including healthcare expenses, home improvements, or supplementing retirement income. The non-recourse feature means borrowers will never owe more than the home value, regardless of how much they borrow or how much interest accrues.
However, HECMs also come with significant considerations. Closing costs and fees can be substantial, including origination fees, mortgage insurance premiums, and servicing fees. Interest accrues over time, and the loan balance grows, potentially reducing inheritance for heirs. Borrowers must continue paying property taxes, homeowners insurance, and home maintenance, or risk foreclosure.
Another important consideration is that a HECM becomes due when the last borrower moves out of the home for 12 consecutive months or passes away. At that point, heirs have options to either repay the loan and keep the home, sell the home to repay the loan, or provide a deed in lieu of foreclosure.
HECM Pricing and Cost Overview
Understanding the costs associated with HECM reverse mortgages is crucial for making an informed decision. Initial costs include an origination fee (capped at $6,000), an upfront mortgage insurance premium of 2% of the home value, and standard closing costs such as appraisal fees, title searches, and recording fees. These costs can typically be financed as part of the loan, reducing out-of-pocket expenses.
Ongoing costs include an annual mortgage insurance premium of 0.5% of the outstanding loan balance, servicing fees, and interest that accrues on the loan balance. Interest rates for HECMs can be fixed or adjustable, with adjustable rates often starting lower but potentially increasing over time. The Department of Housing and Urban Development (HUD) regulates HECM loans and sets certain limits on costs to protect consumers.
The financial implications of a HECM should be carefully weighed against alternatives such as home equity loans, downsizing, or other financial products. The Federal Trade Commission recommends comparing multiple offers and thoroughly understanding all terms before proceeding with any reverse mortgage product.
Conclusion
The Home Equity Conversion Mortgage (HECM) stands as the most commonly used type of reverse mortgage, offering seniors a way to access home equity while aging in place. With FHA insurance providing important consumer protections, HECMs have become a significant financial tool for many older homeowners. However, the decision to obtain a HECM should be made carefully, with full consideration of the costs, obligations, and alternatives. Consulting with a financial advisor and completing the required counseling session can help ensure this complex financial product aligns with your long-term financial goals and needs.
Citations
- https://www.finance.freedom.com
- https://www.reversemortgage.com
- https://www.onereversemortgage.com
- https://www.reversemortgages.com
- https://www.reversemortgage.org
- https://www.hud.gov
- https://www.consumer.ftc.gov
This content was written by AI and reviewed by a human for quality and compliance.