Question 1

What is a home equity conversion mortgage?

Accepted Answer

A Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage available to homeowners age 62 and older. The HECM allows homeowners to convert a portion of their home equity into cash without selling the home or making monthly mortgage payments. The loan is repaid when the homeowner sells the home, moves out permanently, or dies. HECMs are insured by the Federal Housing Administration (FHA) and are the most common type of reverse mortgage. The homeowner retains title to the property and must continue to pay property taxes, insurance, and maintenance.

Question 2

How does a HECM work?

Accepted Answer

HECM mechanics: the homeowner applies through an FHA-approved lender, the maximum loan amount is based on: the borrower's age (older borrowers can access more equity), current interest rates (lower rates allow higher loan amounts), the appraised value of the home (capped at the FHA limit), and the principal limit factor. The homeowner can receive funds as: a lump sum (fixed rate), a line of credit (variable rate, with the unused portion growing over time), monthly payments (tenure or term), or a combination. The loan balance grows over time (negative amortization) as interest accrues on the outstanding balance. No repayment is required until the last surviving borrower permanently leaves the home.

Question 3

What are the requirements for a HECM?

Accepted Answer

Requirements: the borrower must be at least 62 years old, the property must be the borrower's primary residence, the property must meet FHA property standards, the borrower must complete HUD-approved counseling (before applying), the borrower must have sufficient financial resources to pay property taxes, insurance, and maintenance (a financial assessment is required), existing mortgage balances must be paid off (either from HECM proceeds or other funds), and the property must be: a single-family home, a 2-4 unit property (with one unit owner-occupied), an FHA-approved condominium, or a manufactured home meeting FHA requirements.

Home Equity Conversion Mortgage

Home Equity Conversion Mortgage (HECM)

How It Works

Requirements

Related Terms

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