Get a free mortgage rate quote
Home Equity Conversion Mortgages
The FHA's home equity conversion mortgage program (HECM) is designed to let older homeowners convert equity into cash without selling their homes. HECM loans are a type of reverse mortgage, and are made by banks, credit unions, and other typical mortgage lenders.
A home equity conversion loan (HECM) allows homeowners to convert a portion of their home equity into cash that's paid back to them by the mortgage company. As long as they live in the home, they don't have to repay the conversion mortgage. As a result, the HECM offers the opportunity to spend equity without selling or moving.
To be eligible for the HECM, a homeowner must be at least 62 years old and agree to receive free mortgage counseling from a HUD-approved agency. Conversion mortgage borrowers also have to either own their home free and clear, or have a low outstanding mortgage balance that can be paid off from funds provided by the home equity conversion.
Receiving home equity funds
Homeowners can elect to receive home equity conversion payments several different ways:
- Regular monthly cash advances for a specific number of years
- Regular monthly cash advances for life
- A line of credit withdrawn in increments, or in lump sum payments until the credit is exhausted
- A combination of the various payment plans outlined above
HECM withdrawals against equity are calculated by the owner's age, the current rate of interest, and the value of the home. The older an owner is, the more valuable his property. As a result, the interest rate will be lower, and he'll generally receive more money in exchange for his home equity conversion. Eligible properties must be a principal residence that meets FHA standards. If the home needs repairs to come up to those guidelines, the repairs can be financed by the home equity conversion mortgage.
Repayment of a conversion loan
A home equity conversion mortgage need not be repaid until the borrower moves, sells, or dies. But the borrower retains ownership of the home, and has the right to sell it and move if he wants to. In the event that he sells, he's entitled to keep any sales proceeds that exceed the outstanding mortgage balance. At the same time, a borrower can't be forced to sell his home to pay off the mortgage, even if the balance is more than the value of the property.
HECMs and insurance
A mortgage insurance premium paid by the borrower helps protect lenders from losses; therefore, they can make HECM loans with less risk and at more affordable rates. Both lender and borrower enjoy special protections. FHA insurance will cover any balance that's owed; in the event that a lender fails to pay what's promised to the homeowner, the FHA will step in and pay. The conversion mortgage insurance premium, as well as other closing costs, can be paid with proceeds from the HECM loan, so the borrower won't incur significant out-of-pocket expenses.
Leveraging one asset to purchase another one can be a shortcut to wealth, especially when the strategy is applied to real estate. If you own your own home and have watched its value appreciate over...
Looking to buy a home? One of the first things you need to do is save up enough money to be able to make a down payment of at least 20 percent of the purchase cost, right?
Imagining how you're going to enjoy the new comforts of a home renovation after you've been approved for a home equity loan can be relaxing. The expanded living room, bigger bathtub, new...
Seeing that your home's bathroom is falling apart or that the kitchen needs remodeling is easy enough to figure out. Understanding the home improvement loan options to pay for the work can be...
Latest from our Contributors
Browse Mortgage Rates
Browse our comprehensive guides to popular topics related to mortgage and personal finance.