HECM (pronounced HEKUM) is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development. Show A HECM is not a government loan. It is a loan issued by a mortgage lender, but insured by the Federal Housing Administration, which is part of HUD. FHA collects a Mortgage Insurance Premium (MIP) at closing that equals two (2) percent of the home’s appraised value or FHA lending limit ($970,800), whichever number is less. FHA also collects an annual premium equal to 0.5 percent of the outstanding loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund pays off the remaining balance. Currently, HECMs make up most reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling. Private-Label Reverse MortgagePrivate-label reverse mortgages are privately insured by the mortgage companies that offer them. They are not subject to all the same regulations as HECMs, but as a standard best practice, most companies that offer private-label reverse mortgages emulate the same consumer protections that are found in the HECM program, including mandatory counseling. Private-label reverse mortgages can meet the needs of older homeowners whose properties are ineligible for FHA financing — such as units in non-FHA approved condominiums or some planned unit developments (PUDs) — or if their home values exceed $1 million. These loans are sometimes referred to as “jumbo” reverse mortgages because the borrowers may be eligible for more proceeds than they would be with an FHA-insured HECM. The following companies offer proprietary reverse mortgages:
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan. A reverse mortgage can be a crucial way to meet your expenses in retirement. With these loans, your lender actually pays you, using the equity you’ve built in your home over time. You’ll need to meet some strict criteria to qualify for a reverse mortgage — and ultimately, all of the money you borrow will need to be paid back. Let’s go over the most common types of reverse mortgages and how they work: How a reverse mortgage is different than a traditional mortgageWith a traditional mortgage, you make monthly payments until you eventually pay back the entire loan, with interest. A reverse mortgage works just the opposite. Your lender pays you — either with a lump sum, line of credit, or monthly payments — and your loan balance actually grows over time. You generally won’t need to pay the money back until you pass away or move out of the home. At that point, you or your heirs will usually need to sell the home to pay back the amount you borrowed, plus interest and fees that have accumulated. Reverse mortgage fees typically include an origination fee, an upfront mortgage insurance premium at closing, and annual insurance premiums for each year you have the loan. Home equity conversion mortgage (HECM)The most common type of reverse mortgage is the home equity conversion mortgage (HECM), a program insured and regulated by the U.S. Department of Housing and Urban Development (HUD) through the Federal Housing Authority. These loans are designed to help seniors meet living expenses in retirement. Like other mortgage loans, HECM loans can have fixed or adjustable rates. With a fixed-rate loan, you’ll get a lump sum based on your home equity. An adjustable-rate home equity conversion mortgage allows you to choose from a range of payment options. These include:
To qualify for a HECM, you must:
HECMs also have a borrowing limit of $970,800, according to HUD. You may choose to take out a reverse mortgage loan if your savings and Social Security aren’t adequate to meet your expenses in retirement. However, if you’re hoping to leave your home to family members when you pass away, you may want to consider other options. HECM for purchaseWhile many seniors use a reverse mortgage to stay in their current home, you can also use the HECM program to buy a new home. You’ll need to have enough cash to make a large down payment — typically about 50% of the sale price — and pay for closing costs. But once the loan closes, it functions just like any other reverse mortgage. You won’t need to make monthly mortgage payments, but you must live in the home as your principal residence and keep up with taxes, homeowners insurance, and maintenance. While there are a number of upsides to a HECM for purchase, there are some downsides as well. Closing costs on a HECM for purchase loan are higher than many other types of reverse mortgage loans. The large down payment needed may also leave you without as much cash as you’d like to have. Don’t Miss: How to Pay Back a Reverse Mortgage Proprietary reverse mortgageIf your property is worth more than the HECM mortgage limit, you may choose a proprietary reverse mortgage. These loans are backed by private lenders, not by the federal government. They’re generally offered to people with more expensive home values that would be subject to HECM loan limits. You may hear them referred to as “jumbo reverse mortgages.” Eligibility requirements vary based on the lender. Like a HECM, the amount you can borrow with a proprietary reverse mortgage is based on:
As you would with a HECM, you generally only need to repay the proprietary reverse mortgage when you pass away or move out of the home. But qualification criteria, how you access your money, and the fees you’ll pay are all set by the individual lender issuing the loan. You won’t find reverse mortgage loans at Credible, but if you’re looking for a great rate on a conventional refinance loan, including a cash-out refinance, we can help with that. It only takes a few minutes to compare personalized, prequalified refinance rates from all of our partner lenders. Loading widget - refi-rate-table Single-purpose reverse mortgageSome local governments or nonprofits may offer a type of reverse mortgage that can only be used for a specific reason — such as fixing up your home or paying your property taxes. Generally, the federal government doesn’t insure these single-purpose reverse mortgages. Single-purpose reverse mortgages may only be available to low- or moderate-income people, and may only be available to homeowners living in certain areas. These loans are generally the cheapest reverse mortgage option. If you’re concerned about the cost of a reverse mortgage and only need to borrow money for a limited reason, they may be a good choice for you. What to consider when shopping for a reverse mortgageTaking out a reverse mortgage is a significant financial decision, one that can have an impact on your finances for the rest of your life. As you consider whether to borrow, here are some things to keep in mind:
Keep Reading: Reverse Mortgage Alternatives: 5 Options for Seniors |
The most commonly used type of reverse mortgage is known as a
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