Amy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Written By Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Amy Fontinelle Personal Finance ExpertAmy Fontinelle is a freelance writer, researcher and editor who brings a journalistic approach to personal finance content. Since 2004, she has worked with lenders, real estate agents, consultants, financial advisors, family offices, wealth managers.
Personal Finance Expert Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Deborah Kearns Mortgages ExpertWith two decades of experience as a respected journalist and communications leader in the mortgage field, Deborah Kearns is passionate about helping consumers make smart homeownership and personal finance decisions. Her work has appeared in The New Y.
Updated: Jun 9, 2023, 2:14pm
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A home equity conversion mortgage (HECM) is a reverse mortgage that enables seniors to access their home equity without selling their homes or making monthly mortgage payments.
HECMs are the most popular type of reverse mortgage available. Nearly 65,000 senior homeowners took out a HECM from Oct. 1, 2021 through Sept. 30, 2022, according to the National Reverse Mortgage Lenders Association.
Instead of gradually paying a lender back each month, all the money you borrow with a HECM is due when you move out of your house. That sum consists of the principal, interest and mortgage insurance—and closing costs if you finance them. Your move might be caused by your death, a need for assisted living or another reason.
You can borrow the money as a:
The lump sum has a fixed interest rate while the other options have a variable interest rate. Regardless of the option you choose, you can use your HECM proceeds however you want and continue to own your home.
The amount you can borrow is based on three factors:
Like any mortgage product, HECMs come with notable risks, including being used to scam seniors out of their home equity. However, these loans also have a legitimate purpose and can be a good tool for borrowers who need to supplement their income during their retirement years.
Some retirement planning experts have advocated for broader use of the HECM line of credit option. They say seniors should set one up as soon as they’re eligible. Even if you don’t need it now, the line of credit grows over time and can provide a diversified source of retirement income.
For example, you could tap your home equity in years when you might otherwise have to sell investments at a loss to pay for living expenses or medical costs. You won’t pay interest unless you actually borrow money. But you’ll pay closing costs to set up the line of credit, whether you use it or not—which can be a deterrent.
You must meet these basic requirements to qualify for a HECM:
HECM loans are only available through reverse mortgage lenders approved by the Federal Housing Administration (FHA). You can find one through the FHA’s website or find lenders first, then check with the FHA to make sure they’re approved. If possible, it’s best to get preapproved or prequalify with multiple lenders to find the best offer before submitting an official application. Preapproval and prequalification have no impact on your credit score.
The government has many requirements lenders have to follow when issuing HECMs. However, it doesn’t tell lenders what interest rate to charge. A lender with lower fees may charge a higher interest rate.
Fees and other closing costs can vary by lender, although HECM lenders can’t charge more than $6,000 in origination fees. No matter which lender you choose, you can shop around for better prices on third-party closing costs, such as title insurance and closing services.
You’ll also want to pay attention to how much and how often the interest rate can change if you apply for a HECM with a variable rate.
