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HECM Loan Definition
The acronym HECM (pronounced heck-um by industry professionals) stands for home equity conversion mortgage. Congress created the HECM as part of the Housing and Community Development Act of 1987, which was signed into law by President Ronald Reagan.
The HECM is the most popular reverse mortgage in the United States. If somebody you know recently got a reverse mortgage, it likely was a HECM.
Other proprietary (or “jumbo”) reverse mortgages exist, but they mainly target high home values and compose just a small portion of the market.
How a HECM Works
Now that we’ve covered a HECM loan definition, let’s go over how a HECM works. There’s a lot of misinformation circulating about HECM reverse mortgages.
If you’re at least 62, the HECM enables you to convert a portion of your home’s value into cash. No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the required property charges.
You remain the owner of your home and you’re free to leave it to your heirs. If your heirs wish to keep the home, they will need to pay off or refinance the loan balance. If they don’t want the home, they can sell it. Once the sale is complete, the reverse mortgage is paid off, and any remaining equity goes to your heirs.
The HECM is a non-recourse loan; if the home isn’t worth enough to settle the entire loan balance, FHA will cover the shortage.
The HECM is versatile and customizable. Lenders can structure it to meet your financial goals and needs. You can take the proceeds in the form of a line of credit, lump sum, term or tenure income, or some combination of all of these options.
Homeowners commonly use the proceeds to eliminate mortgage payments or other debt payments, finance home improvements, supplement income, or supplement retirement assets.
The HECM is a home loan, so it has an interest rate like any other mortgage. HECM interest rates are typically comparable to traditional 30-year fixed mortgage rates. Again, you don’t have to make any payments; any unpaid interest simply accrues onto the loan balance over time.
How much can you get from a HECM?
How much you can get varies depending on age, home value, interest rates, and the program you select. If you’d like an estimate of how much you can get, check out our reverse mortgage calculator.