HECM Loan Definition and Basics From an Industry Expert

HECM Loan Definition and BasicsWhat the heck is a HECM? You’re in the right place to find out. I’m an industry veteran and I’m happy to offer up a good HECM definition.

I’ll also fill you in on some of the basics about how the HECM program works.

HECM loan definition

If you’re looking for the simplest HECM loan definition, here it is:

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

No repayment is required as long as at least one borrower (or non-borrowing spouse) is living in the home and paying the required property charges (typically property taxes, homeowner’s insurance, etc.).

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

If your heirs choose to keep the home after you die, they simply pay off or refinance the reverse mortgage balance. If choose to sell, then the reverse mortgage is paid off through closing and they keep the remaining equity.

If your heirs choose to sell the home, but don’t want to handle the sale, they can let the lender sell the home. They’ll receive the remaining equity once the reverse mortgage is paid off.

The HECM is very versatile and can be fine-tuned based on 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.

Reverse mortgage borrowers commonly use the proceeds to eliminate existing mortgage payments, pay off other debts, finance home improvements, or supplement existing retirement income and assets.

HECM interest

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

If you choose not to make a mortgage payment (which is the point of the loan, right?), then the interest accrues (along with MIP and any servicing fees) onto the loan balance over time.

How much can you get from a HECM?

Most HECM borrowers tend to qualify for around 45% to 55% of the value of their homes, depending on age, current interest rates, and the program they select (variable-rate HECM or fixed-rate HECM).

For an estimate of how much you can get, please check out our reverse mortgage calculator.