Definition
A home equity conversion mortgage (HECM) is a type of mortgage that is insured by the Federal Housing Administration (FHA), allowing an elderly homeowner to cash out equity in their home through monthly payments.
Analysis
A HECM is the most common type of reverse mortgage. It is popular among retirees that are house rich and cash poor. It allows homeowners to receive periodic payments to use for home repair and upkeep, living expenses and even medical expenses.
Payments may be guaranteed for the life of the last surviving spouse. If the owners want increased payments, they can opt for a more aggressive payment plan that is set for a predetermined number of years.
A HECM has many eligibility requirements that must be met by homeowners. These include:
- signed Certificate of HECM Counseling
- all owners must be age 62 or older
- at least one owner must reside in the home at least 6 months out of the year
- other mortgages must be paid off, or they must be subordinated to the HECM
- the property must meet FHA standards and must be maintained
- fire insurance and property tax payments must be made on-time
HECMs are highly regulated, and carry many fee caps to protect homeowners who need to make adjustments. They also carry substantial cost in relation to other home equity mortgage products.
