Home Equity Conversion Mortgage (HECM)

If you're in the market for a reverse mortgage, in most cases a Home-Equity Conversion Mortgage (or HECM) will probably be the best choice for you, and it's the loan that you'll likely get. More than 80 percent of all reverse mortgages issued are HECMs. They're backed by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA); as such, you're assured that you'll never owe more on your home than it's worth.

HUD's reverse mortgages are available in all fifty states, as well as the District of Columbia and Puerto Rico. They do, however, have limits on the amount of money that can be borrowed. Theoretically, the limits are in place to confine reverse mortgages to those who are in need of extra money. As a matter of fact, every county in the U.S. has its own reverse mortgage limits; the wealthier the county, the higher the limit is set. The proceeds obtained from a HECM can be spent in any manner that you wish, with the exception of paying someone to give you advice about reverse mortgages (but you must talk with a HUD-approved counselor and obtain a certificate for doing so before you'll be allowed to apply for the loan).

In order to qualify for a HECM, you (and anyone else who's applying with you) must be at least 62 years of age. Additionally, you must live in the home, and it must be your principal residence. Qualifying structures include single-family residences, dwellings in a one-to-four unit building or part of a planned unit development, and cooperatives approved by HUD. Mobile homes are generally excluded.

The amount of money that you can receive from a HECM depends upon a number of factors. Your age (and the ages of any other applicants) plays an important role. Generally speaking, the older you are, the more money you can receive because – from the lender's perspective – an older person is not as likely to live as long as a younger person; therefore, the loan can be expected to be repaid sooner.

Of course, the value of your home also has a role in establishing how much you'll receive, as well as the reverse mortgage limit in your county (county limits tend to go up yearly). For instance, if your house is valued at $250,000 and your county's limit is set at $175,000, your loan will be based on $175,000. You would therefore receive a percentage of that $175,000 as a loan. Additionally, the interest rate and how you decide to have the money paid to you are also factored in.

You can choose to receive the loan proceeds in one (or more) of four ways: a lump sum; a line of credit (you decide when and how much money you want to withdraw); a monthly income for a specified period of time, also called a term plan, or; a monthly income for as long as you live in the home, which is known as a tenure plan. You can also choose a combination of these options: for example, a partial lump sum along with the balance available as a line of credit. An additional benefit of the credit-line option is that it grows larger every month because of the interest rate being charged on the loan.

As long as you continue to live in the house, you'll never have to repay the funds. However, the loan would become due if you (and all other borrowers) move to another permanent residence, or if the last remaining borrower does not live in the house for twelve consecutive months, even if this is brought on by illness. The loan would also become due and payable if the house deteriorates beyond ordinary wear and tear and you don't make repairs to it, or if you fail to keep your property taxes and homeowner's insurance current. Once the loan becomes due, you normally have twelve months to repay it.

Finally it should be noted that he closing costs of a HECM tend to be somewhat high. But those costs can be financed into the loan itself. However, keep in mind that doing so will lower the amount of money in the loan that's ultimately available to you.