HECM Loan Definition and Basics From an Industry Insider

HECM Loan Definition and BasicsLooking for a good HECM loan definition? You’re in the right place! I’m a HECM industry veteran and I’ll offer a good HECM loan definition and fill you in on how the HECM works. There are many myths and misconceptions about the HECM, therefore it’s important to get the straight deal from an industry expert.

HECM loan definition and basics

The acronym HECM (pronounced heck-um by industry professionals) stands for home equity conversion mortgage. The HECM is the most common reverse mortgage program in America today.

The HECM is an FHA-insured mortgage that enables seniors 62 and older to convert a portion of their home’s value into cash. No payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges (property taxes, homeowner’s insurance, etc.).

You always remain the owner of the home and are free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.

If your heirs wish to keep the home, they will need to pay off or refinance the loan balance. Otherwise, they can sell the home or let the lender sell it. Either way, the remaining equity will be paid to your heirs after the reverse mortgage is paid off.

If the home isn’t worth enough to settle the entire loan balance, FHA will settle the shortage.

The HECM is very versatile and a good lender fine-tunes it to fit your financial goals and needs. Proceeds can be received in the form of a line of credit, lump sum, term or tenure payments, or some combination of all of these options.

Borrowers commonly use the proceeds to eliminate mortgage payments or pay off other debts. Others use the proceeds to finance home improvements or supplement retirement income or assets.

The HECM is a mortgage, so it has an interest rate like any other mortgage. HECM interest rates are typically comparable to traditional 30-year fixed mortgage rates. Any unpaid interest simply accrues onto the loan balance over time.

How much can you get from a HECM?

How much you can get from a HECM varies depending on age, home value, interest rates, and the program you select. Most HECM borrowers tend to qualify for around 45% to 55% of their home’s value. For an estimate of how much you can get, check out our reverse mortgage calculator.