What is HECM, the Home Equity Conversion Mortgage?

According to US News & World Report, 10,000 baby boomers are retiring every day in America. Unfortunately, many of this generation (and many younger people as well) haven’t saved enough for a comfortable retirement. The HECM allows seniors to tap into their home equity on an ongoing basis, without mortgage payments, and convert it into cash that can be used for any purpose.

What is HECM?

The acronym HECM stands for Home Equity Conversion Mortgage, which is the most common type of reverse mortgage in today’s mortgage lending marketplace. If anybody you know got a reverse mortgage in the past few years, chances are it was the HECM.

The HECM was created by Congress in 1987 and is today insured and regulated by the Federal Housing Administration (FHA).

What is a Reverse Mortgage?

The HECM reverse mortgage is a very unique and often misunderstood loan product. The idea behind a reverse mortgage is to allow seniors to tap into their homes and convert equity into cash they can use to eliminate mortgage payments, pay off other bills, or supplement existing retirement income.

If you’re considering a HECM reverse mortgage, the following are a few highlights you should know:

  • No monthly payments are required for as long as you live in the home.
  • You retain ownership of your home and can pass it on to your heirs.
  • The loan doesn’t need to be paid back until you leave the home for good.
  • Loan distributions don’t impact Social Security and Medicare and are not subject to income taxes.
  • You can never owe more than the value of your home at repayment time. You and your heirs are not responsible for any loan balance higher than the value of the home.
  • FHA insures and regulates the HECM.

All you have to do to hold up your end of the bargain is pay the taxes and insurance, live in the home, and maintain it.

Eligibility Requirements

The only eligibility requirements for the HECM are that you be at least 62 years old, live in the home, and not be delinquent on any federal debts.

No Credit Or Income Qualification

Because the HECM doesn’t require payments, it also doesn’t require credit or income qualification. You could have terrible credit and limited income and still be able to qualify.

There’s some buzz that some income requirements could be implemented in the future, but for now, there’s not.

HUD-Mandated Counseling

Because seniors are a demographic often targeted by the unscrupulous, FHA requires that all HECM applicants attend a counseling session with a HUD-approved counselor before completing their loan application. Once you’ve decided to move forward with a HECM, your lender will be able to give you a list of HUD approved counselors you can contact. Most will charge around $100 to $150 for the session and you’ll likely need to pay that out of pocket.

Closing Costs

One of the oft cited downsides of the HECM is the cost. Because the HECM is insured by FHA, mortgage insurance is required just as with a standard FHA loan. In the case of the HECM, two types of mortgage insurance is charged:

  • A one time upfront MIP of 2% of the lesser of the appraised value or $625,500 (the maximum loan limit).
  • Annual MIP of 1.25% of the loan amount, paid in 12 monthly installments.

In addition, the usual closing costs also could be charged, including title, appraisal, escrow, etc. Typically, the only closing costs you’ll need to pay out of pocket are the appraisal and the counseling fee.

A Great Way to Supplement Retirement Income

For the right borrower, the HECM is a great option to tap into home equity and convert it to cash that can be used to eliminate mortgage payments, pay off other bills, and supplement existing retirement income.


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About Mark Fitzpatrick

Mark Fitzpatrick is a reverse mortgage professional with over seven years of experience in mortgage banking. In his spare time he enjoys reading, skiing, surfing, and spending time with his family and friends. You can stay current with Mortgages By Mark by getting free email blog updates or subscribing to my RSS feed. NMLS #382064.
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