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HECM | What is a Home Equity Conversion Mortgage?

HECM Loan

HECM stands for Home Equity Conversion Mortgage.

A HECM is the official government term for what many now call a “reverse mortgage.”

It allows a homeowner to convert their equity into a mortgage, so they have access to that money 🙂

In addition, it does not require a monthly payment out-of-pocket.

Instead the interest gets added to the loan balance every month. This allows homeowners the ability to keep ownership, live in the property as long as they live and never having to make a monthly mortgage payment again.

The HECM loan is a government insured by the FHA.

This insurance gives this loan protection, so homeowners can always can on the available money they secure with a reverse mortgage.

Homeowners can also remain protected that they can stay in the home for as long as they live as long as they do not infringe on any of the maturity events.

  • Pay and remain current on all property charges, such as property taxes, homeowners insurance and any association fees.
  • Continue to call the property your primary residence.
  • Do not change ownership on title

If at anytime the homeowner decides to sell the home or refinance into another mortgage they are permitted to do so without any penalty.

The HECM loan would just need to be paid through the transaction just like any standard mortgage.

HECM Loan Proceeds

Homeowners can choose to take their HECM loan proceeds in a few different ways.

HECM loan proceed options can be utilized using 1 of the 3 methods or a combo of all of the 3 methods. It is completely up to the homeowner when setting up the HECM.

Lump Sum – A lump sum is a cash-out payment given to the homeowner once the HECM loan funds. The money will either be directly deposited into the homeowners bank account at funding, or a check can be sent.

Line of Credit – If a homeowner does not need a large lump sum given to them from the HECM loan then a line of credit might be a better option.

All of the money that is allocated to a line of credit will not be charged interest as long as it remains in the line of credit.

Only when the homeowners requests money will that amount then be added to the loan balance a subsequently be charged interest.

Another great feature is any money being left in the line of credit will actually grow from month-to-month.

There is a growth rate attached to the HECM loan, so homeowners can see more available money to them available in the line of credit as the months go on.

Receive a Monthly Payment – Homeowners who prefer regular distributions of money such as receiving social security or a monthly pension can setup something very similar with the HECM loan.

If a homeowner chooses to do so they can setup to receive a monthly payment based on a specific monthly amount, or a specific span over time.

Homeowners can even setup a monthly payment that will last a lifetime.

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HECM Reverse Mortgage History

A brief history on how the HECM reverse mortgage came to be.

1987 was the first time that Congress enacted a demonstration program in the National Housing Act of 1987 with Ronal Reagan’s support.

To help enact the new product HUD created a development team.

Over the next couple years they developed the HECM’s principal limit model, actuarial risk assessments and customized payout plans of which we still see as cornerstones to the HECM reverse mortgage today.

On October 19, 1989 the first HECM reverse mortgage was issued to Marjorie Mason of Fairway, Kansas.

HUD selected 50 lenders to be apart of offering the initial HECM program. They also created a third-party counseling session that we still see as a requirement today.

Over the next decade the HECM continued to be tested by HUD in its demonstration status.

From 1990 to 1997 only 25,000 HECM reverse mortgage loans were allowed to be offered each year.

In 1998 something major happened.

In the HUD Appropriations Act the word “demonstration” was removed from the program permanently.

Allowable HECM reverse mortgages shot up from just 25,000 each year to 150,000.

Since that date the annual allowable HECM loans has increased as the popularity of the program has increased and become part of mainstream retirement solutions.

30 years later these HECM reverse mortgages are still helping many senior homeowners across the nation.

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