A reverse mortgage is a popular way for retirees to supplement their retirement income. A home equity conversion mortgage (HECM) is the Federal Housing Administration’s reverse mortgage program, which allows borrowers to withdraw some of the equity in their home. It has stricter eligibility requirements than other reverse mortgages, but it is also the only reverse mortgage insured by the U.S. Government.
Here’s a look at the unique aspects of an HECM compared to a traditional reverse mortgage, the pros and cons, and the all-important fees that come with reverse mortgage financing arrangements.
What Is a Reverse Mortgage?
A reverse mortgage loan is a way to obtain financing using your home as security. In most cases, the home must be your primary residence. You, as the borrower, receive either a lump sum or an amount each month. You accrue interest and pay fees based on the amount you receive, and the amount you owe the lender increases over time. As your loan balance increases, your home equity decreases. You pay back the loan when you sell the house, permanently move away, or pass away.
When someone with a reverse mortgage dies, the heir who has inherited the house settles the loan balance, either by repaying the outstanding loan amount, selling the home and keeping any remaining proceeds after settling the loan, or signing over the deed to the lender.
What Is an HECM?
A home equity conversion mortgage (HECM) is one type of reverse mortgage. It is the most popular type of reverse mortgage, but it is only available to people aged 62 and older. This is the only reverse mortgage insured by the U.S. Government and is only available through a lender approved by the Federal Housing Administration (FHA). (It’s not to be confused with an HECM for purchase, which allows homebuyers aged 62 and older to purchase a home with the loan proceeds from a reverse mortgage.)
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Key Similarities
HECMs and other types of reverse mortgages share similarities. One is that they are a popular way for seniors to supplement their income if they have significant equity in their home. Another is that borrowers remain responsible for paying the property taxes and homeowners insurance for the life of the loan.
Key Differences
There are always reverse mortgages pros and cons. But there are also key differences when you examine an HECM vs. a reverse mortgage.
• Age of borrowers: A reverse mortgage is an option for anyone aged 55 or older. An HECM is only available to those aged 62 or older.
• Payout options: Reverse mortgages typically only offer a lump-sum payout. An HECM has more options, such as a lump sum, monthly payouts, or a credit line.
• Stricter eligibility requirements: The HECM property must be a primary residence, the homeowner must have a certain amount of equity, and the homeowner must have the ability to pay property taxes and homeowners insurance.
• FHA-insured: The HECM is the only reverse mortgage insured by the U.S. federal government and is only available through an FHA-approved lender.
• Mortgage insurance: This may not be required for a proprietary mortgage, but it is for an HECM.
• Lending limits: For an HECM the lending limit is $1,149,825 for 2024. Lending limits may be higher for other reverse mortgages.
Pros of an HECM
The main advantages of an HECM are that monthly payments are not required because the loan is paid back when the home is sold. Also, lenders do not set a minimum credit score to qualify. The table below lists the pros of an HECM.
| No required monthly payment | Borrowers can pay down the principal each month, pay just interest, or pay nothing at all until the home is sold. |
| No minimum credit score | Lenders do not look for a minimum credit score, but they may do a credit check to look for federal tax liens or loan delinquencies. |
| FHA-insured | The FHA protects you if your mortgage is more than your home’s value. |
| No spending restrictions | You can spend the money from an HECM on whatever you like. |
| No income taxes | The money from an HECM is not subject to income tax. |
| Guaranteed income | As long as you stay in your home, you are guaranteed the income from an HECM. |
| Home ownership | When it is time to sell your home, any remaining equity after paying off the mortgage belongs to you or your heirs. |
Cons of an HECM
In the HECM vs. reverse mortgage equation, the cons of an HECM are mostly related to the strict eligibility requirements listed in the table below.
| Age requirements | You must be at least 62 years of age. This applies to your spouse also if you are applying together. |
| Home maintenance | You must live in the home as your primary residence and maintain it appropriately. |
| Free of debt payments | You must be free of debt payments and up-to-date on your insurance and property taxes. |
| Scams are rife | Some HECMs are scams. It’s wise to consult a financial advisor before signing anything so that you understand the terms and consequences of the loan. |
| Potential loss of aid | The IRS does not consider an HECM as income, so you do not have to pay taxes on the financing. However, the money may affect any Supplemental Security Income or Medicaid you may be eligible for. |
Comparing Costs and Scenarios
A reverse mortgage does not require a monthly payment, but you will pay origination, servicing, and third-party fees, property taxes, and insurance. These fees are paid back when you sell your home, move, or pass away.
The amount that you can borrow through a reverse mortgage will be less than the full value of your home to cover the cost of insurance and origination fees. Also, the younger you are the less you can borrow because you are expected to live longer, giving the loan more time to grow before the debt is paid. If you’re thinking about a reverse mortgage, it might be wise to also look at a home equity line of credit (HELOC), which is another way to borrow based on the equity you have in your home. HECM vs. HELOC is worth considering as there are costs and benefits in each case.
Insurance Premiums
For an HECM, you will likely pay a mortgage insurance premium (MIP) at closing and an annual MIP for the life of the loan. The MIP charge at closing is based on the home’s appraised value or the HECM loan limit, whichever is less. Insurance fees are typically 2% of your home’s appraised value upfront, and then you will be charged an additional 0.5% of the total loan value annually. There will also be an origination fee of around 3% of the loan value.
The HECM loan limit is $1,149,825 for 2024.
Origination Fee
Your lender will charge an origination fee for processing your HECM loan. According to the U.S. Department of Housing and Urban Development (HUD), the lender can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000 or $2,500, whichever is the greater amount. However, the lender cannot charge more than $6,000.
Here are a few scenarios for an HECM loan with different home values and the associated costs. Note that not all lenders charge the maximum fee, so it pays to shop around.
1. Home value: $100,000
The home’s value is less than $125,000 so the lender will charge $2,500.
2. Home value: $175,000
Since the home is valued at more than $125,000 but less than $200,000, the lender will charge a maximum of 2% of the home’s value, or $3,500.
3. Home value: $350,000
Since the home is valued at greater than $200,000, the lender may charge up to 2% ($4,000) plus 1% for the remaining $150,000 ($1,500), for a total of $5,500.
Servicing Fee
The servicing fee covers the cost of calculating and sending statements and making sure taxes and insurance premiums are up to date. If the interest rate is fixed or annually adjusted, the monthly fee may be around $30. If the interest rate is adjusted monthly, the fee might be slightly higher and around $35. At closing, the lender may set aside the servicing fee and add the cost to your loan balance each month.
Third-Party Fees
Third-party fees are closing costs and include survey and appraisal fees, title and title insurance fees, and credit checks. These are likely to be in the range of $1,000 to $2,000.
Interest Rates for HECMs
Reverse mortgage interest rates are another factor to consider. It’s not easy to find the interest rates for HECMs. However, you can find recent average rates on the HUD website. The interest rate will vary between private and HECM loans, but the latter tend to have lower interest rates because they are backed by the FHA.
Fixed vs. Adjustable Interest Rate
Most lenders offer monthly adjustable interest rates. The lender calculates an adjustable HECM by including an index and setting a margin. The margin does not change after the loan is originated, but the index fluctuates according to the market. Reverse mortgage borrowers can’t typically predict how much interest they will ultimately pay because the term of the loan is uncertain and interest continues to mount over the life of the loan. How much interest will ultimately accrue is somewhat uncertain for both variable and fixed rate reverse mortgages, so it is wise to discuss the pros and cons with a lender and with a financial advisor as well.
💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.
The Takeaway
An HECM is a type of reverse mortgage. It has stricter eligibility requirements compared to other reverse mortgages. To qualify for an HECM, you must be aged 62 or older and should be relatively free of debt.
There are benefits to an HECM. For example, it is FHA-insured and you don’t have to pay tax on the payouts. However, an HECM may affect your eligibility for Supplemental Security Income or Medicaid. Also, the lending limits are lower for an HECM. Seekers of a reverse mortgage or an HECM should be careful not to fall victim to a scam and a fraudulent loan — do your research carefully and only work with a lender that has a good reputation. Consider asking a trusted financial advisor for a recommendation.
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FAQ
Is an HECM the same as a reverse mortgage?
An HECM is a type of reverse mortgage. However, it is only available to people aged 62 and older. An HECM is insured by the U.S. federal government and is only available through a Federal Housing Administration (FHA)-approved lender.
What are the main differences between an HECM vs. reverse mortgage?
The main differences between an HECM and a reverse mortgage are that an HECM is only available to those aged 62 or older. An HECM is also FHA-insured. The payout options are often more flexible for an HECM, whereas a private reverse mortgage might only offer a lump sum payout.
Are the qualifications the same for an HECM and reverse mortgage?
No. For an HECM, you must be 62 years old or older, whereas other reverse mortgages are available to those 55 and over. For an HECM, the property must be your primary residence, and the equity requirements might be higher for an HECM than a private reverse mortgage. Also, the lender will want to see that you can pay property taxes and homeowners insurance.
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