What’s the difference between a HECM mortgage and a reverse mortgage?

When considering a reverse mortgage, you may have a choice between various types of reverse mortgages. The most popular type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) which is insured by the Federal Housing Administration (FHA). However, HECMs are often considered different from reverse mortgages. But, are they different?

The only difference between a HECM and a reverse mortgage is that HECM is a type of reverse mortgage, but not all reverse mortgages are HECMs. A reverse mortgage allows senior homeowners to borrow against their home equity, and receive disbursements either as a lump sum, monthly payment, or a line of credit. Apart from HECMs, other types of reverse mortgages include proprietary reverse mortgages and single-purpose reverse mortgages.

What is a HECM mortgage?

A Home Equity Conversion Mortgage (HECM) is a reverse mortgage that is backed by the federal government, and it allows senior homeowners to tap into their home’s equity. Eligible borrowers qualify to receive disbursements either as a lump sum payment, monthly payment, or line of credit. The loan must be repaid when the homeowner moves out, sells the property, or dies.

HECM is federally insured by the U.S. Department of Housing and Urban Development (HUD) and is regulated by both HUD and the FHA. The FHA guarantees that the loan will be repaid if it ever goes into default, so lenders are willing to offer HECM loans with low-interest rates and flexible terms.

Borrowers are required to pay the mortgage insurance, a loan origination fee, and closing costs. They can choose to pay these costs out-of-pocket or wrap them into the reverse mortgage loan.

Who qualifies for a Home Equity Conversion mortgage?

To qualify for a HECM loan, you must be age 62 years or older, own your home fully or have a low mortgage balance, and meet HUD's financial requirements.

Your income and credit score are not as important as your age and equity in the home. Borrowers with lower credit scores can still qualify for a HECM, but they may have to pay a higher interest rate.

HUD also requires that borrowers attend a HUD-approved counseling session as part of the mortgage application process. The counseling session will help you understand the risks and benefits of a reverse mortgage so that you can make an informed decision about whether or not to proceed with the loan.

HECM vs. Reverse Mortgage

All HECM loans are reverse mortgages, but not all types of reverse mortgages are HECMs. HECMs are reverse mortgages backed by the federal government and issued by an FHA-approved lender. Typically, non-HECMs reverse mortgages may have higher interest rates than HECMs and fewer consumer protections.

It’s important to research both types of loans before committing to one. Also, regardless of the type of reverse mortgage that you choose, the loan must be repaid when the homeowner dies, moves out of the home, or sells it. Also, if you default on your financial obligations, you risk foreclosure on your home.

HECM vs. traditional mortgage

Unlike a traditional mortgage, HECM borrowers receive payments from the lender, and they are not required to repay the loan until a qualifying event occurs. The borrower can opt to receive a lump sum payment, line of credit, periodic payment, and a combination of these options.

In comparison, a traditional mortgage is paid in arrears, and it requires borrowers to start making monthly payments immediately after the closing date. The loan is considered paid off when the last payment has been made.

For seniors who need extra money to supplement their retirement income or cover medical expenses, a HECM can be an attractive option. If you are considering a mortgage and don't know which one to choose between a HECM and a traditional mortgage, consider these factors and decide what would work best for you.

HECM vs. Home Equity Loan

A HECM loan allows senior homeowners to borrow against the equity they have in their homes. The loan proceeds can be used to pay medical bills, make a large purchase, or supplement retirement income.

A home equity loan allows homeowners to borrow against the value of their home, and the money can be used to consolidate debt or finance home improvements. Typically, a home equity loan is typically more flexible than a HECM, as it allows borrowers to choose their repayment terms.

When considering whether to take out a HECM or home equity loan, it is important to understand the differences between the two types of loans. A HECM is generally less expensive than a home equity loan because it does not require homeowners to make monthly payments.

However, a HECM is typically more difficult to qualify for since borrowers must meet certain age and equity requirements. A home equity loan, on the other hand, is easier to qualify for and it allows borrowers to choose their repayment terms.

Other types of reverse mortgages

Single-purpose reverse mortgage

A single-purpose reverse mortgage can only be used for a specific purpose, such as home repairs, home improvements, or paying off debts. This type of reverse mortgage has a lower interest rate and it comes with more consumer protections than other types of reverse mortgages. However, they are less flexible than HECMs, since they are limited to a specific purpose.

Proprietary reverse mortgage

A proprietary reverse mortgage is issued by private lenders, and it is not FHA-insured. These reverse mortgages typically charge a higher interest rate than the FHA-insured HECM loan.

Proprietary reverse mortgages allow homeowners to borrow more than the HECMs limit, but they come with more risks and should only be considered after researching all the options available.

It’s important to weigh the pros and cons of each type of reverse mortgage before making a decision, as each option has its own unique set of advantages and disadvantages. Be sure to speak with a HUD-approved counselor to help you understand how a reverse mortgage can affect your financial future

Conclusion

When considering a reverse mortgage, it is important to understand the different types of reverse mortgages available. A HECM is FHA-insured, and you can use it for any purpose including to finance retirement expenses such as medical bills or long-term care.

Single-purpose reverse mortgages are issued by private lenders and can only be used for specific purposes, such as home repairs or paying off debts. These mortgages typically have lower interest rates and come with more consumer protections than other types of reverse mortgages. However, they have less borrowing power than other HECMs.

Proprietary reverse mortgages are issued by private lenders and they allow homeowners to borrow more money than a HECM allows; however, these come with more risks and higher interest rates.

Be sure to speak with a HUD-approved counselor to help you understand which reverse mortgage is ideal for your situation, and the alternatives you have.