What a HECM is
A Home Equity Conversion Mortgage (HECM) lets a homeowner turn part of their home equity into cash without making monthly mortgage payments. Instead of the balance going down over time, it goes up, as interest and mortgage insurance are added to it. The loan is repaid when the last borrower dies, sells the home or moves out for good.
HECMs are insured by the Federal Housing Administration (FHA), part of HUD. Some lenders also offer private, or proprietary, reverse mortgages with their own rules; this guide covers the HECM.
Who qualifies
- Age. Every borrower must be 62 or older. A spouse under 62 cannot be a borrower, but can be named on the loan as an eligible non-borrowing spouse, which can let them stay in the home after the borrower dies, as long as the conditions are met.
- Your main home. You must live in the home as your principal residence. A vacation home or rental property does not qualify.
- Equity. You need to own the home outright or have substantial equity. Any existing mortgage must be paid off at closing, usually with the reverse mortgage proceeds.
- No delinquent federal debt, such as unpaid federal taxes or a defaulted federal student loan, unless it is paid off or resolved, which can sometimes be done from the proceeds at closing.
- Counseling. Before applying, you must complete a session with a HUD-approved HECM counselor, who is independent of the lender.
- A financial assessment. The lender reviews your credit history, income and assets to judge whether you can keep paying property taxes, insurance and other charges on the home.
If the financial assessment raises concerns, the lender may set aside part of the loan to pay taxes and insurance for you. That reduces the money available to you.
Which homes qualify
Single-family homes, two- to four-unit homes where you live in one of the units, and condominiums approved by HUD generally qualify, as do manufactured homes that meet FHA requirements. The home must also meet FHA property standards, so an appraiser may call for repairs before or after closing.
What you must keep doing
There is no monthly mortgage payment, but the loan has conditions, and breaking them can make it due and payable, which can lead to foreclosure:
- Keep paying property taxes, homeowners insurance and any HOA dues or other property charges.
- Keep the home in reasonable repair.
- Keep living there as your principal residence. Being away for more than 12 months in a row for health reasons, for example in a care facility, can make the loan due.
How much you can get, and what it costs
The amount you can borrow, called the principal limit, depends on the age of the youngest borrower or eligible non-borrowing spouse, the expected interest rate, and the home's value up to a national limit that HUD sets each year. Older borrowers and lower rates generally mean more money available. In the first year, the amount you can take is usually limited to 60% of the principal limit, with exceptions for paying off an existing mortgage and other required obligations.
Costs include an origination fee, which federal rules cap; an upfront mortgage insurance premium and an annual one charged on the balance; and the usual third-party closing costs such as the appraisal and title. Most can be paid from the loan rather than in cash, which increases the balance.
A HECM is non-recourse. When the home is sold to repay the loan, neither you nor your heirs owe more than the home is worth, even if the balance has grown larger. Heirs who want to keep the home can do so by repaying the balance, or 95% of the home's appraised value if that is less.
Running the numbers
The HECM Reverse Mortgage Calculator takes the age of the youngest borrower, the estimated home value, the interest rate and your current mortgage balance. It flags basic eligibility problems such as age, and estimates the principal limit, the upfront costs, and what remains after paying off an existing mortgage. You can compare monthly income, a cash draw and a line of credit, and see how the loan balance and your remaining equity change over time. A lender's quote and your counseling session give the figures that apply to you.