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What is a HECM reverse mortgage, and do you qualify?
Are you nearing retirement and paid off most (or all) of your mortgage loan? You have several options to take advantage of your home equity. You can enjoy living without monthly mortgage payments or sell the house and pocket the money to downsize to a smaller home. Another option is to tap your home equity with a home equity conversion mortgage, also known as a HECM reverse mortgage.
Read more: What is a reverse mortgage?
In this article:
What is a HECM reverse mortgage?
A HECM is a type of reverse mortgage insured by the Federal Housing Administration (FHA) designed to help people 62 years of age or older convert some of their home equity into cash. Borrowers can then use the money in any way they wish, whether to consolidate their debts, pay for large expenses, or supplement their retirement income.
Learn more: What is an FHA loan, and how does it work?
How do home equity conversion mortgages work?
A home equity conversion mortgage is a type of reverse mortgage, which means it allows you to receive money using the equity in your home as security. Remember that this is a loan, so you will have to repay the money with interest.
You can choose between an adjustable-rate or fixed-rate HECM. With an adjustable-rate program, you’re able to choose between withdrawing funds as a series of fixed payments, a line of credit, or a combination of the two. With a fixed-rate HECM, you must receive the money in one lump sum.
The amount you can borrow with a home equity conversion mortgage is based on many factors, including your interest rate and age. It also depends on the lesser of the three following factors: the appraised value of the home, the sales price, or the HECM FHA mortgage limit (which is $1,149,825 in 2024).
Because they’re reverse mortgages in which you receive money, HECMs don't require monthly payments. However, interest and fees will accumulate on the outstanding loan balance until you move out of the property, sell the home, or pass away — then the loan must be repaid in full. This means that over the life of your HECM, your debt increases as your home equity decreases.
HECMs may sound similar to home equity loans, but they’re two different types of mortgages. The key differences are that you don't have to be 62 years old to be eligible for a home equity loan, and you’ll have to start repaying the loan shortly after taking it out.
Learn more: Types of mortgage loans
HECM eligibility requirements
To qualify for a HECM, you have to meet the following borrower and property criteria.
Borrower requirements
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You must be at least 62 years old.
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The property must be your primary residence.
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You must have paid off all or most of your mortgage balance.
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You can’t be delinquent on any federal debt.
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You must be able to afford ongoing property charges, such as taxes and HOA dues.
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You must attend a consumer information session provided by a HECM counselor approved by the U.S. Department of Housing and Urban Development (HUD).
Property requirements
Your home must meet all FHA rules regarding property standards and flood requirements. It also has to be one of the following types of properties:
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Single-family home
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A two- to four-unit home where you live in one of the units
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Manufactured home
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Condo
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Townhouse
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Home in a planned unit development (PUD)
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Property held in a living trust
How much do home equity conversion mortgages cost?
HECMs have several fees and charges that can quickly add up. Before considering this financing option, make sure you can comfortably afford these costs.
One-time up-front costs
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Origination fees. HECM origination fees are capped at $6,000.
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An up-front mortgage insurance premium (MIP). On closing day, you’ll also have to pay an initial MIP, which is 2% of your home’s appraised value or the maximum HECM lending limit, whichever is less.
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Other closing costs. These typically cover an appraisal, property survey, recording fees, title search and insurance, inspection, credit check, real estate taxes, and other fees.
If you can’t afford to pay these up-front costs out of pocket, you can finance them into your reverse mortgage — but doing so will eat into the proceeds you receive from the loan.
Read more: What is a property survey, and how much does it cost?
Ongoing costs
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Interest. When you take out a HECM, you agree to repay the borrowed money, plus interest. The interest rates can be fixed or variable.
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Servicing fees. Servicing fees cost up to $35 per month and are paid to your lender to cover the costs of services like sending you account statements and disbursing the money to you.
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Annual MIP. This is equal to 0.50% of your outstanding mortgage balance.
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Property charges. You still must pay regular homeownership fees, such as homeowners insurance and property taxes.
Dig deeper: Understanding FHA mortgage insurance premiums (MIPs)
Pros and cons of HECMs
HECMs can sound like a pretty great idea, especially if you’re nearing retirement and a good chunk of your net worth is tied up in your home. But as with any other type of home loan, HECMs come with some downsides you should be aware of.
Pros
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You can stay in your home. Instead of selling your property or downsizing to unlock your home equity, HECMs allow you to keep your home and still receive cash in exchange for your equity.
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You can use the proceeds to fund your retirement. If a large portion of your wealth is tied up in your home, HECMs lets you turn your illiquid asset into cash that you can use to fund your retirement lifestyle.
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No tax liability. According to the IRS, the money you receive from your reverse mortgage is considered loan funds — not income — which means they’re not taxable.
Cons
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HECMs can be an expensive way to borrow. HECMs come with plenty of up-front and ongoing fees that can quickly add up. And as interest accumulates on your loan balance each month, your debt will continue to increase as your home equity drops.
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Your heirs may inherit less money. When you pass away, your heirs will need to repay the loan in full. This typically means selling the home or turning it over to the mortgage lender. They can buy the house, but they’d still need to pay off the HECM first.
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Variable interest rates. Some HECMs come with variable interest rates, meaning the rate can fluctuate throughout the loan's term, typically in response to changes in the market. This could make your loan more expensive if rates go up.
Learn more: Fixed-rate vs. adjustable-rate mortgages
HECMs vs. other reverse mortgages
There are three types of reverse mortgages: HECM, proprietary, and single-purpose. Home equity conversion mortgages make up most of the reverse mortgages on the market today.
Unlike HECMs, proprietary reverse mortgages are not insured by the federal government, and they tend to cater to borrowers who want to borrow more money than they could with a HECM. However, since these loans are offered by private lenders, they may come with higher interest rates than HECMs.
A single-purpose reverse mortgage is the least expensive type of reverse mortgage. It’s typically offered by state and local governments and nonprofit organizations. But unlike HECMs, which can fund any of your financial needs, single-purpose reverse mortgages can be used only for the purpose specified by the lender. For example, some lenders may only allow you to use the proceeds for home repairs.
Where to find a home equity conversion mortgage
You can apply for a HECM by contacting an FHA-approved lender. The HUD has provided a list of FHA-approved lenders on its website. Make sure to shop around and compare the terms, fees, and rates from at least three different lenders before choosing one to work with.
Remember that before applying for a HECM reverse mortgage, you must meet with a HUD-approved HECM counselor. The counselor will explain the costs and help you explore alternatives to a reverse mortgage to find the best fit.
Read more: Best FHA mortgage lenders
FHA HECM reverse mortgage FAQs
What is the HECM loan limit?
According to HUD, the HECM loan limit in 2024 is $1,149,825. But this doesn’t mean you can automatically borrow $1,149,825 — the exact loan amount will depend on factors like your age, current mortgage rates, and the home’s appraised value.
How long can you stay in your home with a HECM?
You can stay in your home as long as you want, but if you pass away, your reverse mortgage loan will become due and payable. Your heirs will have 30 days to buy, sell, or turn the home over to the lender to pay off the remaining debt balance. If they need more time, they can contact a HUD-approved counselor or a lawyer to extend the timeline to six months.
Can I lose my home with a reverse mortgage?
Yes, it’s possible to lose your home with a reverse mortgage if you don’t keep the property in good repair, fail to make payments such as property taxes and mortgage insurance, or don’t physically live in the property for more than 12 consecutive months. And if you can’t afford to pay off your reverse mortgage, you could lose the home to foreclosure. According to the American Bankruptcy Institute, around 20% of reverse mortgage loans taken out from 2009 to 2016 are expected to go into default because the homeowners did not fully pay their taxes or insurance.
This article was edited by Laura Grace Tarpley.
