Home Equity Conversion Mortgage - HECM

A type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors to convert the equity in their home to cash. The amount that may be borrowed is based on the appraised value of the home (subject to FHA limits), and the age of the borrower (borrowers must be at least 62 years old). Money is advanced against the value of the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold or the borrower(s) die, at which point the mortgage must be repaid entirely. Because the home secures the mortgage, no credit check is made on the borrower.

Privately sponsored reverse mortgages might allow for higher borrowing amounts, and have lower costs than HECMs, but HECMs typically have a lower interest rate. The economics of a HECM versus a privately sponsored reverse mortgage will depend on how long the borrower expects to live or own the home. Since the FHA insures HECM loans, the borrower will not owe more than value of the loan in the event that the loan exceeds the value of the home's equity.

A home equity loan is an alternative to a reverse mortgage, however, unlike a reverse mortgage, a home equity loan will require a credit check. Additionally, a home equity loan will most likely have substantially lower costs than a HECM, but a higher interest rate.