How Does a HECM Loan Work?

How does a HECM loan work? Great question! The HECM is a fantastic home loan program that enables seniors to convert a portion of their home’s value into cash that can be used for any purpose.

The HECM is not always the perfect solution for everybody, but it’s a great option for the right candidate.

What is a HECM?

The acronym HECM stands for home equity conversion mortgage. The HECM is a federally-insured mortgage program that enables seniors 62 or older to convert a portion of their home’s value into cash.

As long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges, no mortgage payments are required.

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

The HECM is a non-recourse loan. This means the most that will ever have to be repaid is the value of the home. If the home is not worth enough to pay off the entire loan balance, FHA will cover the shortage.

The HECM is a very versatile home loan; it can be fine-tuned based on your individual financial needs and goals. Proceeds can be received in the form of a lump sum, term or tenure payments, line of credit, or some combination of all of these options.

HECM borrowers commonly use the proceeds to get rid of existing mortgage payments, eliminate other debts, finance home improvements, or supplement existing retirement income or assets.

You’re free to use the cash for pretty much whatever you like!

How does a HECM loan work?

The HECM is a mortgage, so it has an interest rate like any other mortgage. However, interest rates tend to be very comparable to traditional 30-year fixed mortgage rates.

If you choose not to make a mortgage payment (which is the point, right?), the interest simply accrues onto the loan balance over time.

The amount of proceeds available varies from one person to another, but it’s typically between 45% to 55% of the home value for most people. Proceeds are calculated based on the following factors:

  • Age of the youngest borrower (or non-borrowing spouse)
  • Home value
  • Expected interest rate (EIR)
  • The program you select (variable-rate HECM or fixed-rate HECM)

Older borrowers tend to qualify for more than younger borrowers. The HECM also tends to offer more proceeds when interest rates are low versus when rates are high.

The HECM has been particularly attractive in recent years because interest rates have been low and home values have been high. As a result, the program has offered more money than might have been available in previous years.

A great home loan option

So, how does a HECM loan work for you? As I mentioned, the HECM is a very versatile home loan program. It is fine-tuned to help meet your individual financial goals and needs. You can eliminate existing mortgage payments, pay off other debts, or supplement existing retirement income or assets.

The HECM brings home equity into the retirement funding picture so that you can more easily protect and preserve your retirement lifestyle.