How a Home Equity Conversion Mortgage Works (HECM)

April 20, 2022 By Michael Branson 18 comments

What is a HECM Reverse Mortgage?
HECM program basics
Who qualifies for a HECM loan?
How does a HECM work?
How much does it cost?
What is required?
How FHA insurance works and what it guarantees
Requirements of all HECM loans
How a HECM compares with a HELOC
HELOC vs Reverse Mortgage Product Comparison
Additional resources and where to learn more about the HECM program
HECM FAQs

What is a HECM Reverse Mortgage?

While many people are familiar with the concept of a reverse mortgage, fewer know the ins and outs of the “HECM,” or Home Equity Conversion Mortgage. This specific type of reverse mortgage, which comprises the vast majority of reverse mortgages in the U.S., is insured by the Federal Housing Administration and follows rules and regulations set by the Department of Housing and Urban Development.

While some states have specific rules that apply to reverse mortgages beyond what the HECM program requires, the program is offered nationally and for the most part HECMs are the same state to state.

For anyone considering a reverse mortgage, it’s a good idea to have a basic understanding of what the HECM program is and how it works.

In this article you will learn:

HECM program basics
How FHA insurance works and what it guarantees
Requirements of all HECM loans
How a HECM compares with a HELOC
Additional resources and where to learn more about the HECM program

HECM program basics

The HECM program is regulated by the Department of Housing and Urban Development (HUD) and has been in place for several decades. The HECM program was designed to allow senior homeowners who are age 62 or older to tap into their home equity via a reverse mortgage while they still live in their homes.

In other words, the HECM loan allows qualifying homeowners to age in place and access their home equity to pay for needs and wants they may have later in life.

Who qualifies for a HECM loan?

The program is available to qualifying borrowers who own their homes outright or have a significant amount of equity, and who are age 62 or older. All HECM borrowers must undergo a financial assessment administered by the lender to determine their willingness and ability to maintain the requirements of the loan, including payment of taxes and homeowners’ insurance.

How does a HECM work?

While a forward mortgage balance falls over time, a reverse mortgage balance grows over time, as the borrower accesses the equity and accrues loan interest, all of which must be repaid when the loan comes due and payable after a maturity event; typically, being when the borrower passes away, or moves from the home permanently.

Borrowers can receive their proceeds in several ways including a lump sum payment, line of credit, or term or tenure payments.

How much does it cost?

The HECM program requires an upfront mortgage insurance premium (MIP) and annual insurance premiums over the course of the loan. The MIP is based upon the loan amount. Upfront closing costs may include an origination fee as well as standard settlement fees.

What is required?

Among the requirements of the HECM program, borrowers must complete HUD-approved reverse mortgage counseling prior to applying for the loan. Once the loan has closed, borrowers must maintain homeowners’ insurance and their property taxes, as well as upkeep to FHA standards.

How FHA insurance works and what it guarantees

FHA insurance offers several protections and covers both the lender and the borrower. Borrower protections include the HECM’s non-recource feature, which means the borrower will never owe more to repay the loan than the home is worth at the time of sale.

Additionally, FHA insurance guarantees the borrower will receive his or her loan proceeds as agreed upon under the terms of the loan, even in the event the lender goes out of business.

Requirements of all HECM loans

The HECM program has several requirements. Among the requirements of the borrower:

The borrower must be 62 years or older
The borrower must own the property, or have a low enough mortgage balance remaining that the existing loan can be paid off with a HECM loan
All borrowers must take part in a Department of Housing and Urban Development-approved counseling session
The home must be the borrower’s primary residence
The borrower must not have any delinquent federal loans (such as student loans)
The borrower must meet financial assessment requirements as set by the lender, which may include a credit score minimum and income qualification

Qualifying property types include 1–4-unit dwellings and condo units that are FHA-approved.

How a HECM compares with a HELOC

Many borrowers will consider how comparable options such as selling the home or taking out a Home Equity Line of Credit (HELOC) stack up against a HECM.

While the HELOC also allows borrowers to access home equity while they live in the home, there are some key benefits of a HECM that a HELOC does not offer, such as the guarantee that a HECM credit line will never be frozen by the lender.

HELOC vs Reverse Mortgage Product Comparison

Compare Features	Traditional Home Equity Line of Credit (HELOC)	Home Equity Conversion Mortgage (HECM)	Proprietary Reverse Mortgage (Non-FHA)
Borrower Minimum Age	18	62	55
Line of Credit Term	10 Years	Lifetime	10 Years
May Be Frozen	Yes*	No*	Yes*
Line of Credit Growth Rate	No	For Life	7 Years
$0 Monthly Payment Option	No	Yes	Yes
Income Requirements	Yes	Limited	Limited
Credit Score	680+	Any	Any
Reserves	2-6 Months PITI	Any	Any
Low/No Closing Costs	No	No	Yes
Fixed Interest Rate	No	No	No
Common Index	Prime Rate	Treasury	Treasury

*HELOC loans generally permit lenders to freeze or reduce a credit line if the value of the home declines significantly. You must be prepared to make this “balloon payment” by refinancing by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose your home.
Source: https://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf

**All line of credit programs may be frozen if you fail to maintain taxes and insurance, or leave your home as your primary residence. If you enter bankruptcy, courts will not allow you to incur new debt while in BK proceedings and therefore your line of credit during this time could also be frozen.

Additional resources and where to learn more about the HECM program

There is a wealth of information online about HECM loans and reverse mortgages in general, including some information that is outdated.

One benefit of the HECM program is that there are up-to-date resources maintained by HUD and the FHA to help guide borrower education and provide answers to questions existing borrowers may have.

A licensed originator may also assist with pointing you in the direction to learn more.

HECM FAQs

Is a HECM the same as a reverse mortgage?

HECM stands for “Home Equity Conversion Mortgage”. This is the most commonly used reverse mortgage loan, but it is not the only reverse mortgage option. The HECM is the government insured reverse mortgage program through FHA.

What is the downside to a reverse mortgage?

The primary downside of a reverse mortgage is the balance is increasing over time due to the fact that no monthly mortgage payments are required. With an increasing balance, the equity position of the property is changing and therefore reducing the potential inheritance for your heir.

How does a HECM reverse mortgage work?

A reverse mortgage allows you to borrow money using your primary residence as collateral without the burden of making mandatory monthly mortgage payments. The loan does not have to be paid back until the last surviving borrower vacates the property permanently or when you sell the home.

Can you lose your house with a reverse mortgage?

Yes. A reverse mortgage requires that you live in the home as your primary residence, maintain the property taxes and insurance as well as the upkeep of your home. Failure to do any of these will result in the loan being called due and payable which could lead to foreclosure.

What happens when you outlive a reverse mortgage?

You cannot outlive a reverse mortgage loan. A reverse mortgage borrower cannot have their loan called due and payable simply because the accrued balance exceeds the value of the home. As long as the borrower continues to live in the home as their primary residence while maintaining the taxes, insurance and upkeep of the home the loan remains in good standing.

If you would like more information about HECM loans, visit HUD’s HECM Program homepage, or contact us at All Reverse Mortgage to speak with a licensed loan originator.

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About the Author, Michael G. Branson | Mike@allreverse.com

Michael G. Branson CEO, All Reverse Mortgage, Inc. and moderator of ARLO™ has 40 years of experience in the mortgage banking industry. He has devoted the past 17 years to reverse mortgages exclusively.

18 Comments on this Article

Leiland T.
August 29th, 2022

Hi ARLO,

My parents have a HECM. The current payoff is about $333,000. The maximum principal amount in the contract is $352,500. My parents took a lump sum at the beginning of the contract in 2009, $140,000. My question is, will the payoff on the HECM continue to rise at the 5.56% annual rate? My parents are in good health, and we do not anticipate them passing any time soon. The current market value of the home is well over the current payoff. Please advise. Thank you.
Reply to Leiland
- ARLO™
  August 29th, 2022
  
  Hello Leiland,
  
  Yes, that loan will continue to accrue interest at 5.56% plus the MIP renewal (.50% if memory serves me correctly). They have the option to just let the balance continue to rise and continue to live in the home or they can choose to sell the home at this time and reinvest the equity in another property or wherever they choose.
  If you or you and your siblings (if you have any brothers and/or sisters) are able and are so inclined to do so, you can also choose to fund a family reverse for your parents if both you and your parents would like to do so.
  I would recommend that you speak with an attorney or accountant to establish it in the best possible way to avoid taxes but if this is something you all want to do, I have spoken with people in the past whose family tax advisers were able to set things up for them that they felt would benefit all parties and create the least tax burden on the heirs as a result while keeping the home in the family and preserving equity. I have not spoken with anyone who has done this for a while and tax laws are subject to change so I would strongly suggest you get competent legal and tax guidance before you do anything.
  
  I am aware that not all families have this option. Many borrowers opted for the fixed rate loan that required them to take a full draw and this option didn't help a lot of borrowers as it meant accruing interest on the entire balance from the start - even if they didn't need all the money. They can repay some of the funds if they wish to and do not believe they will need them if they are sitting in a bank savings account collecting very little interest. They need to know that if they do repay some of all the funds, on the fixed rate option, they can never repay the money and reborrow it - but there is no prepayment penalty.
  Depending on how much the home is worth over the current loan amount, they can choose to pay off the old loan with a new reverse mortgage and can opt for an adjustable loan that allows them to only borrow what they need. This means that if their new line available would give them more money now, but they don't need that money now, they do not need to take any advances and can leave the money in the line (which also grows on the unused portion of the line). Then the larger line gives them more money available to use later if they need it.
  
  It all depends on your goals. As you said, they are in good health and if you are looking to stop all interest accruing you may want to look for a way to eliminate the loan. If you want to find a way to get them the access to more money without having to be the source of those funds, you may want to check into a refinance into the line of credit program.
  Reply to ARLO
Donna K.
April 27th, 2022

When we moved in 2015, we took out a HECM mortgage, we put down $100,000 on a sales price of $300,000. The value now is $370,000, my latest statement shows loan balance $280,000. If we sell, am I looking at the difference of the $280,000 minus the $370,000?
Reply to Donna
- ARLO™
  May 2nd, 2022
  
  Hello Donna,
  That would be correct. The HECM loan balance has grown by $80,000 over the past 7 years with the interest accrual because you have not been required to make any mortgage payments during this time.
  With a standard or forward mortgage, you would have a larger equity position but would have been making those payments on a monthly basis.
  Reply to ARLO
Gus A
April 22nd, 2021

Hello,

Can you use funds from the HECM to purchase a Second Home or an Investment Property?
Reply to Gus
- ARLO™
  April 27th, 2021
  
  Hello Gus,
  
  You can use the funds for any purpose you wish. The only thing that HUD frowns on is a lender that provides you the loan and also sells you a financial product or service that may tie those funds up or put them at risk. One such product that lenders should not offer their reverse mortgage clients are annuities. But you can use the funds for purchasing other property if you wish.
  Reply to ARLO
Pierre O.
February 2nd, 2021

Can I use HECM to make a down payment on a house for my daughter?
Reply to Pierre
- ARLO™
  February 2nd, 2021
  
  Hello Pierre,
  
  You can use HECM loan proceeds for any reason you wish.
  We have seen parents use the money for their children and even grandparents who wanted to see some of their inheritance go to grandchildren while they were still there to see them enjoy it.
  It is your house and your money. If you would like to help your daughter by giving her the cash for the down payment on a home of her own, you certainly may.
  Reply to ARLO
George W.
January 30th, 2021

My home was appraised at $287,000.00. The reverse mortgage company paid off my $120,000.00 mortgage. The reverse mortgage company set my new mortgage at $430,500.00. What caused it to be so high?
Reply to George
- ARLO™
  February 2nd, 2021
  
  Hello George,
  
  HUD prefers that the loan amount on the HECM loan documents is left blank when possible and then the terms of the amount you borrow, and repayment is fully spelled out withing all the paperwork because the balance on the loan continues to rise if you make no payments.
  You start at one amount, but that amount grows over time as you accrue interest if you make no payments and none are required. Also, if you have a HECM line of credit and you do not use the money, that line grows over time giving you more money available to borrow later in the term of the loan and HUD does not know at the time the loan closes how high your line will get in available funds at the time the loan closes.
  However, most states require an amount to be listed on the loan documents, they will not allow the lender to leave the amount unlisted on the Note and Deed. When the states require a number, HUD requires the lender to insert an amount equal to 1.5 times the value of the home or the HUD Maximum Lending Limit, whichever is less.
  The maximum lending limit for HUDs HECM is currently $822,350. Since your value is $287,000, the amount would be 1.5 times $287,000 ($287,000 is lower than $822,350) and that is $430,500. A home valued at $822,350 or above would all have the amount of $1,233,525 on the documents.
  
  You only owe what you borrow plus any fees or interest that accrue on that amount and if you pay the loan off in a few years, you will not be anywhere near that $430,500 figure.
  If you take a full draw of all funds from the start to pay off an existing loan, live in the home for the next 30 years and make no payments for the entire time, you may owe more than $430,500 but those amounts are all shown on the amortization schedule you received with your loan documents.
  And if you pay payments at times (you are never required to make any payments, but you can choose to make any payment in any amount if you wish), you may not owe as much as shown on the schedule.
  Since the lender has no way of knowing how many future draws you will make, at what intervals or what interest rates will do in the future (if you have an adjustable rate line of credit) or what repayments you may choose to make (true with a fixed or adjustable rate loan), the amortization schedule is just an estimate.
  But the amount shown on the documents is 1.5 times the value of the home or the HUD HECM maximum lending limit, whichever is less, at the time you close the loan and does not dictate the amount you owe on the loan.
  Reply to ARLO
Ostud
September 24th, 2020

I am 69 and my wife is 59. Can we still get an HECM?
Reply to Ostud
- ARLO™
  September 24th, 2020
  
  Hello,
  
  Yes you can in all states but Texas where the law prohibits it. Your wife would be an approved non-borrowing spouse.
  She would not have access to any funds still on the line if you pass before the funds are all used but she would still be allowed to remain in the home for life without making a payment on the loan.
  Reply to ARLO
Edward D.
April 5th, 2020

Does Arlo calculate a HECM to HECM refinance?
Reply to Edward
- ARLO™
  April 7th, 2020
  
  Hello Edward,
  
  Arlo does not give results for HECM refinance loans but there is a very good reason for that. Firstly, when determining the amount owed, you have to include the current balance, add interest that would accrue between the time you apply and the time the loan closes and also any money still available to the borrower to determine the real benefit of the new loan.
  It is very difficult to convey all the HUD requirements for refinancing the loan including the two different specific benefit requirements, that we ask borrowers to contact us with these requests so that we can go over them each individually. Because the requirements for a HECM to HECM refinance are often difficult to convey even when you do have all the correct information, we do not want to have borrowers getting only half of the answer or an incorrect answer due to the fact that they just were not able to locate all of the necessary information to input into ARLO.
  We would still be more than happy to give you a no hassle, no obligation proposal based on your parameters though if you would like to contact us.
  Reply to ARLO
Queen J.
August 12th, 2019

We are thinking about a HECM loan. The home we live in is new 6 months. my husband is 72 & I am 70, how long must we occupy the home before we can apply for a reverse mortgage?
Reply to Queen
- ARLO™
  August 12th, 2019
  
  There is no minimum time required. If you occupy the home as your primary residence, you are eligible now.
  Reply to ARLO
Michael
August 12th, 2019

I have been exploring the possibility of taking an HECM but the mortgage Insurance Upfront premium seems to make the product way overpriced. In California our home is worth well over $1 Million which would make our initial premium $14, 530. This seems extremely expensive. You would also have to pay interest and annual premium on the $14,530 balance. Sounds like a very bad deal to me.
Reply to Michael
- ARLO™
  August 12th, 2019
  
  Hello Michael,
  
  The HUD mortgage insurance is required on all FHA reverse mortgages. Since your home is valued over $1,000,000, have you considered looking at the proprietary or jumbo reverse mortgage programs?
  They really are not too beneficial for borrower whose homes are worth less than $900,000 just to avoid paying the mortgage insurance premium but many borrowers in your position are pleased with the jumbo results and there is no mortgage insurance on the private programs.
  Reply to ARLO

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