Home Equity Conversion Mortgage (HECM)

Key takeaways

• A HECM is the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA).
• It lets homeowners aged 62+ convert home equity into cash without monthly mortgage payments; the loan becomes due when the home is sold, the borrower moves out, or dies.
• Funds can be taken as a lump sum, a line of credit, monthly payments, or combinations; payment method affects interest type and cost.
• Borrowers must continue to pay property taxes, homeowners insurance, HOA fees, and maintain the property.
• HECMs include origination fees, closing costs, interest, and mortgage insurance premiums, which reduce available equity.

What is a HECM?

A Home Equity Conversion Mortgage (HECM) is an FHA-insured reverse mortgage that allows eligible homeowners (62 and older) to tap their home equity for any purpose—living expenses, home repairs, debt consolidation, or to establish a financial safety net. Unlike a traditional mortgage, borrowers are not required to make monthly principal-and-interest payments; interest and fees accrue and are repaid when the home is sold or the loan becomes due.

How HECMs work

• Loan amount: Based on the home’s appraised value, borrower age(s), and current interest rates. The FHA insures the loan.
• Repayment triggers: The full loan balance is due if the last surviving borrower dies, the property is sold, the borrower permanently moves out, fails to occupy the home as a primary residence for more than 12 consecutive months, or violates loan terms (e.g., fails to pay property taxes or insurance).
• Borrower obligations: Continue to pay property taxes, homeowners insurance, HOA fees, and keep the home in good repair. Failure to meet these obligations can lead to foreclosure.
• Non-recourse: HECMs are generally non-recourse loans—repayment cannot exceed the home’s value at sale (subject to FHA rules).

Fund disbursement options

How funds are taken affects interest structure and cost:

• Lump sum
• One-time cash payment.
• Typically tied to a fixed interest rate.
• Most expensive if you don’t need all funds immediately because interest accrues on the entire amount from disbursement.
• Line of credit
• Draw as needed; interest charged only on amounts withdrawn.
• Generally adjustable-rate.
• Often the most cost-efficient flexible option.
• Monthly payments (tenure or term)
• Regular monthly payouts for life (tenure) or for a set period (term).
• Adjustable-rate in many cases; can be combined with a line of credit.

HECMs can combine options (e.g., initial lump sum plus a line of credit).

Costs and mortgage insurance

• Typical costs: origination fees, closing costs, servicing fees, and ongoing interest.
• Mortgage Insurance Premiums (MIP): FHA mortgage insurance protects borrowers and lenders; MIP can be financed into the loan, which reduces the available equity (net principal limit).
• These fees and accrued interest reduce the home’s remaining equity over time.

Maximum loan amounts are set by FHA program limits; the maximum HECM principal limit (current FHA cap) is substantially lower than the value of very high-priced homes, and proprietary reverse mortgages may be available for larger loan needs.

Proprietary reverse mortgages

Proprietary (private) reverse mortgages are not FHA-insured. They are offered by private lenders and sometimes allow higher loan advances for higher-value homes (but terms and protections differ). Compare proprietary products and HECMs carefully: HECMs have FHA-backed protections and predictable rules, while proprietary products vary in cost and features.

Eligibility

Basic FHA HECM requirements:
* Age: At least 62 years old.
* Ownership: Own the home outright or have substantial equity.
* Primary residence: Must occupy the home as primary residence.
* Financial assessment: Demonstrate the ability to stay current on property taxes, insurance, and maintenance; not delinquent on federal debt.
* Counseling: Complete a HUD-approved HECM counseling session.
Acceptable property types include single-family homes, 2–4-unit homes with borrower occupying one unit, FHA-approved condominiums, and certain manufactured homes that meet FHA standards.

Risks and downsides

• Costs: Upfront and ongoing fees and mortgage insurance can be high.
• Equity depletion: Interest and fees reduce home equity over time, potentially leaving less for heirs.
• Foreclosure risk: Failure to pay property charges or maintain the property can trigger loan due status and possible foreclosure.
• Residency requirement: Extended non-occupancy (e.g., long-term institutional care) can make the loan due.

Alternatives

Consider depending on needs and eligibility:
* Single-purpose reverse mortgages (often offered by nonprofits or local agencies) — typically lower-cost but limited in scope.
* Home equity loan or HELOC — if you can make monthly payments and prefer lower total borrowing costs.
* Downsizing — sell the home, move to a less expensive property, and preserve or leave funds to heirs.
* Personal savings, investments, or borrowing from family.

Bottom line

A HECM can provide flexible access to home equity for homeowners 62 and older without monthly mortgage payments. It’s most appropriate for borrowers who need cash while remaining in their homes and can meet ongoing property obligations. However, high fees, mortgage insurance costs, and the potential impact on heirs make careful comparison, counseling, and consideration of alternatives essential. For official guidance and counseling, consult HUD-approved HECM counselors and resources from the Consumer Financial Protection Bureau and the Department of Housing and Urban Development.