HECM (Home Equity Conversion Mortgage)

What is a HECM (Home Equity Conversion Mortgage)?

A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage insured by the Federal Housing Administration (FHA) that allows homeowners who are 62 years of age or older to convert part of their home equity into cash. Unlike traditional mortgages, HECM does not require monthly mortgage payments. Instead, the loan balance grows over time and is repaid when the borrower sells the home, moves out, or passes away.

Examples of HECM in Use

Home Improvement Financing: A retired couple may obtain a HECM to fund necessary home repairs or improvements, such as fixing a leaking roof or updating a bathroom, without needing to use their retirement savings.
Supplementing Retirement Income: A widowed homeowner might use a HECM to supplement their retirement income, helping cover daily expenses and healthcare costs while remaining in their home.
Paying Off Existing Mortgage: An elderly homeowner with an existing mortgage could use a HECM to pay off their remaining mortgage balance, eliminating the need for monthly mortgage payments and improving their cash flow in retirement.

Frequently Asked Questions

How does a Home Equity Conversion Mortgage work?

A HECM allows eligible homeowners to borrow against the equity in their home. The amount available typically depends on the borrower’s age, the home’s appraised value, and current interest rates. Borrowers receive the loan in various payout options such as a lump sum, monthly payments, line of credit, or a combination. The loan is repaid when the borrower sells the property, permanently moves out, or passes away.

Who is eligible for a HECM?

To qualify for a HECM, the borrower must be at least 62 years old, own the home outright or have significant equity, use the home as their principal residence, have no delinquent federal debts, and have financial resources to cover taxes, insurance, and maintenance.

What are the costs associated with a HECM?

The costs can include origination fees, mortgage insurance premiums (MIP), third-party charges, servicing fees, and interest. These costs are generally financed into the loan, although some may require upfront payment.

Can the homeowner lose their home with a HECM?

Yes, homeowners can face foreclosure if they fail to meet the terms of the loan, such as not paying property taxes, homeowners insurance, or maintaining the home.

What happens to the HECM loan when the borrower passes away?

The loan becomes due and payable when the borrower passes away. Heirs can repay the loan to keep the house, or the house can be sold to pay off the loan, with any remaining equity going to the heirs.

Reverse Mortgage

A type of loan available to seniors that allows them to convert part of the equity in their homes into cash. The loan comes due when the borrower sells the home, moves out, or passes away.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit secured by the borrower’s home, allowing the homeowner to borrow money as needed up to a certain limit, repay it, and borrow again.

Loan-to-Value (LTV) Ratio

The LTV ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In the context of a HECM, it determines how much a borrower can receive based on their home equity.

Principal Limit

The maximum borrowing amount available through a reverse mortgage. It depends on factors such as the age of the youngest borrower, the appraised home value, and current interest rates.

Online Resources

References

U.S. Department of Housing and Urban Development (HUD)
Consumer Financial Protection Bureau (CFPB)
National Reverse Mortgage Lenders Association (NRMLA)

Suggested Books for Further Studies

The New Reverse Mortgage Formula: How to Convert Home Equity Into Tax-Free Income by Tom Kelly
Reverse Mortgages for Dummies by Sarah Glendon Lyons and John E. Lucas
The Retirement Frontier: A Reverse Mortgage Guide to Streamlining Your Retirement by Paul Johnson

Real Estate Basics: HECM Fundamentals Quiz

### What is a primary advantage of a Home Equity Conversion Mortgage (HECM)? - [x] It allows seniors to convert home equity into cash without monthly mortgage payments. - [ ] It increases the home's appraised value. - [ ] It is available to homeowners of all ages. - [ ] It allows for unlimited borrowing against home equity. > **Explanation:** A primary advantage of a HECM is that it allows seniors to convert home equity into cash without needing to make monthly mortgage payments. ### At what age can homeowners qualify for a HECM? - [ ] 55 years old - [ ] 60 years old - [x] 62 years old - [ ] 65 years old > **Explanation:** Homeowners must be at least 62 years old to qualify for a HECM. ### What factor does NOT affect the amount a homeowner can borrow with a HECM? - [x] The homeowner's employment status - [ ] The appraised value of the home - [ ] The homeowner's age - [ ] Current interest rates > **Explanation:** The homeowner's employment status does not affect the amount that can be borrowed through a HECM. ### How is a HECM loan repaid? - [ ] Through monthly mortgage payments - [ ] Through annual lump-sum payments - [x] When the home is sold or the borrower moves out or passes away - [ ] Through refinancing > **Explanation:** A HECM loan is typically repaid when the home is sold or the borrower moves out or passes away. ### What costs are typically associated with a HECM? - [ ] Only origination fees - [ ] Only homeowners insurance - [x] Origination fees, mortgage insurance premiums, third-party charges, and interest - [ ] There are no costs associated > **Explanation:** Costs associated with a HECM can include origination fees, mortgage insurance premiums, third-party charges, and interest. ### Can heirs keep the home after the borrower's death? - [ ] Only if they meet age restrictions - [ ] No, the home must always be sold - [x] Yes, if they repay the loan - [ ] Only if they assume the existing mortgage > **Explanation:** Heirs can keep the home after the borrower's death if they repay the loan. ### Which organization insures HECM loans? - [ ] Federal Reserve - [ ] Fannie Mae - [x] Federal Housing Administration (FHA) - [ ] The borrowers' insurance providers > **Explanation:** HECM loans are insured by the Federal Housing Administration (FHA). ### What key obligation must be maintained by the homeowner to avoid foreclosure under a HECM? - [x] Paying property taxes and homeowners insurance and maintaining the home - [ ] Making monthly mortgage payments - [ ] Ensuring the home's market value remains high - [ ] Living with a cosigner > **Explanation:** Homeowners must pay property taxes, homeowners insurance, and maintain the home as required under a HECM to avoid foreclosure. ### What is the principal limit in a HECM? - [x] The maximum borrowing amount available - [ ] The upfront cost of the mortgage - [ ] The appraised value of the home - [ ] The monthly payment amount > **Explanation:** The principal limit in a HECM is the maximum borrowing amount available to the borrower. ### What happens to the loan if the homeowner with a HECM fails to meet obligations such as paying property taxes? - [ ] Increased borrowing limit - [ ] Reduction in interest rate - [x] Risk of foreclosure - [ ] Loan forgiveness > **Explanation:** If the homeowner fails to meet obligations such as paying property taxes, they risk foreclosure under a HECM.