What is a Home Equity Conversion Mortgage (HECM)?
A Home Equity Conversion Mortgage (HECM) is the Federal Housing Administration’s (FHA) insured version of a reverse mortgage. It lets homeowners age 62 or older convert part of their home equity into cash without required monthly mortgage payments. The loan balance (borrowed funds + interest + fees) becomes due when the last surviving borrower dies, sells the home, or permanently moves out. Borrowers must continue to occupy and maintain the property and pay property taxes, homeowners insurance, and other property charges. (Sources: HUD; CFPB; Investopedia)
Key takeaways
– HECMs are the most common reverse mortgage and are FHA-insured.
– Eligibility generally requires being age 62+, living in the property as a principal residence, completing HUD-approved counseling, and meeting basic financial/credit assessments.
– Loan proceeds can be taken as a lump sum, monthly payments, a line of credit, or a combination.
– HECMs charge closing costs, origination fees, and mortgage insurance premiums (MIP); these fees can be financed into the loan, reducing available equity.
– HECMs are non-recourse loans: heirs cannot owe more than the home’s sale proceeds, subject to FHA rules. (Sources: HUD; CFPB; Investopedia)
How a HECM works
– Eligibility and counseling: Prospective borrowers must complete counseling with a HUD-approved counselor who explains costs, alternatives, and obligations. (HUD; CFPB)
– Loan amount: The available principal depends on the home’s appraised value, the HECM lending limit, the borrower’s age(s), current interest rates, and the chosen payment plan. (HUD; Investopedia)
– Disbursement options determine rate type: Fixed-rate HECMs generally require a single-lump-sum at closing. Adjustable-rate HECMs allow for other payment options (line of credit, term or tenure monthly payments, or combinations). (Investopedia)
– Repayment: No monthly mortgage payments are required. The loan becomes due and payable when the last surviving borrower dies, sells the home, or permanently moves out. Borrowers must keep current on property taxes, homeowners insurance, and property upkeep or risk default. (HUD; CFPB)
How HECM funds can be disbursed
– Lump sum: Entire allowed amount is taken at closing (often available only with fixed-rate HECMs).
– Line of credit: Access funds as needed; unused credit may provide future purchasing power.
– Monthly payouts: Regular term payments for a fixed period or lifetime payments for as long as one borrower lives in the home.
– Combination: Mix of line of credit and monthly payouts.
Choice of disbursement affects interest type and loan behavior; compare options with a counselor or lender. (Investopedia; CFPB)
2025 HECM maximum loan limit
– The FHA sets an annual maximum HECM lending limit. For 2025 the limit is $1,209,750. (HUD Mortgage Limits 2024–2025 guidance)
Mortgage insurance premiums (MIP)
– HECMs carry FHA mortgage insurance that protects borrowers and lenders. MIP includes an upfront premium and ongoing annual premiums. These costs increase the loan balance but can often be financed into the loan. Because MIP and fees are added to the loan, the net amount available to the borrower (the principal limit) is reduced. (HUD; CFPB)
Proprietary reverse mortgages vs. HECMs
– HECMs: FHA-insured, available only from FHA-approved lenders, subject to HUD rules and MIP.
– Proprietary reverse mortgages: Private loans not FHA-insured; sometimes offer higher loan amounts for very high-value homes and may have different fee structures. They may be appropriate for borrowers whose homes exceed the HECM lending limit or who want different terms. Compare costs and protections carefully. (Investopedia; CFPB)
Who is eligible for a HECM?
Basic eligibility requirements include:
– Age 62 or older (for at least one borrower).
– Home must be the borrower’s principal residence.
– Home type: single-family homes, FHA-approved condos (subject to HUD rules), certain 2–4 unit properties with one unit occupied by the borrower, and some manufactured homes that meet FHA requirements.
– Completion of HUD-approved reverse mortgage counseling.
– Financial assessment: lenders evaluate ability to pay property taxes, insurance, and home maintenance; existing mortgage balances typically must be paid off at closing from the HECM proceeds.
– Must obtain the loan from an FHA-approved lender. (HUD; CFPB; Investopedia)
Can you lose your home with a HECM?
Yes — the HECM can become due (and foreclosure can follow) if:
– The borrower dies and heirs do not sell or otherwise repay the loan.
– The borrower permanently moves out (for example, into a nursing home) or no longer occupies the property as a principal residence for more than 12 consecutive months.
– The borrower fails to keep current on property taxes, homeowners insurance, or maintain the home.
– The borrower transfers title without meeting lender requirements.
Important protections: HECMs are generally non-recourse loans, meaning the borrower or heirs will not be required to repay more than the home’s value at sale (subject to FHA rules). Heirs may repay the loan and keep the home or sell the home to satisfy the debt. (HUD; CFPB; Investopedia)
Are HECMs expensive?
HECMs can be costly relative to other options. Common costs include:
– Upfront origination fees and closing costs (appraisal, title, recording, etc.).
– FHA mortgage insurance premiums (upfront and ongoing).
– Servicing fees and interest over time.
These costs reduce home equity and the amount available to borrowers. Whether the expense is justified depends on individual circumstances—how long you plan to remain in the home, how much you need, and alternatives available. (CFPB; HUD; Investopedia)
Good alternatives to a HECM
Depending on objectives and eligibility, consider:
– Single-purpose reverse mortgages: Offered by state or local governments or nonprofits for specific uses (cheaper if you qualify).
– Home sale and downsizing: Cash out equity by selling and move to a less expensive home or rental.
– Home equity loan or HELOC: Require monthly payments but may have lower overall costs for certain borrowers.
– Sell home and use proceeds to buy a smaller home outright or buy with a mortgage that fits your monthly budget.
– Other income strategies: investments, reducing expenses, or family assistance.
Compare costs, tax and estate consequences, and long-term goals before choosing. (CFPB; FTC; Investopedia)
Practical steps to evaluate and get a HECM
1) Clarify your goals and needs
– Why do you need the funds (monthly income, home repairs, medical costs, emergency reserve)? Estimate amounts and timelines.
2) Take HUD-approved counseling (required)
– Counseling explains the HECM’s costs, alternatives, and obligations and is required before closing. Find a counselor at HUD’s counselor search. (HUD)
3) Compare options and gather quotes
– Get quotes from multiple FHA-approved lenders for HECM and proprietary reverse mortgage options. Compare interest rates, origination fees, MIP, and other charges. Also compare non-reverse alternatives (HELOCs, downsizing).
4) Review disbursement choices and rate types
– Decide whether you need a lump sum, monthly payments, a line of credit, or a combination. Ask how choice affects interest rate (fixed vs. adjustable) and available funds.
5) Complete the application and financial assessment
– Lender orders an appraisal and evaluates ability to pay property charges. Any existing mortgage usually is repaid at closing.
6) Close the loan and receive proceeds
– Closing costs and MIP can often be financed into the loan; confirm how that affects the net principal limit.
7) Maintain the home and documentation
– Keep property taxes and insurance current, maintain the home, and live there as your principal residence. Keep records of payments and communications.
8) Estate planning and notifying heirs
– Inform heirs about the loan terms and how repayment will be handled (sale, refinance, or repayment). Review estate plans with an attorney as needed. (HUD; CFPB)
How to avoid common problems
– Attend the required counseling so you understand obligations and alternatives.
– Budget for property taxes, homeowners insurance, and maintenance — these are ongoing requirements.
– Keep clear records and promptly respond to lender communications.
– Be cautious of scams: avoid unsolicited marketing that pressures immediate decisions and always work with FHA-approved lenders and HUD counselors. (FTC; CFPB)
The bottom line
HECMs let eligible homeowners 62+ convert home equity into cash without monthly mortgage payments, offering flexible disbursement options and FHA insurance protections. They have important costs and obligations: mortgage insurance, fees, and the requirement to maintain the home and pay property charges. HECMs can be a useful tool for retirement cash flow or emergency funds but are not right for everyone. Required HUD counseling and getting multiple lender quotes are essential steps to make an informed decision. (HUD; CFPB; Investopedia)
Sources and further reading
– U.S. Department of Housing and Urban Development (HUD), “Home Equity Conversion Mortgages (HECMs) for Seniors”
– Consumer Financial Protection Bureau (CFPB), “Reverse Mortgages: A Discussion Guide”
– Federal Trade Commission (FTC), “Reverse Mortgages” and “Home Equity Loans and Home Equity Lines of Credit”
– Investopedia, “Home Equity Conversion Mortgage (HECM)” (source URL you provided)
If you’d like, I can:
– Help you find a HUD-approved HECM counselor in your area;
– Summarize and compare sample lender quotes (if you provide them); or
– Run a quick hypothetical calculation of how much you might qualify for given your home value, age, and current mortgage balance. Which would you prefer?