What Is an HECM Reverse Mortgage?

Not all reverse mortgages are the same. The home equity conversion mortgage, insured by the federal government, is available only through a Federal Housing Authority-approved lender. For homeowners 62 years of age or older with significant equity in a home, an HECM may be an attractive idea. It's a way to supplement retirement income by allowing eligible homeowners to access a portion of the equity.

The funds received through an HECM can be used to pay off medical bills or update the home — it's a helpful financial tool. HECMs can be extremely flexible, permitting changes in the ways that seniors receive funds as their needs change over the years. Most of the loan proceeds are usually paid out over time rather than up front; there's no repayment obligation so long as the borrower lives in the house.

Requirements include:

• Be 62 years of age or older.
• Own the property outright or have paid down a considerable amount of the mortgage.
• Occupy the property as the principal residence.
• Not be delinquent on any federal debt.
• Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and homeowner association fees.
• Participate in a consumer information session given by a Housing and Urban Development-approved HECM counselor.

What type of dwelling is eligible for an HECM? Any of the following, but they must meet all FHA property standards and flood requirements:

• A single-family home or a two-to-four-unit home with one unit occupied by the borrower.
• A HUD-approved condominium project.
• A manufactured home that meets FHA requirements.

How much loan will you get? Known as the principal limit, it's determined by such factors as:

• The age of the borrower.
• Current interest rates.
• The lesser amount of the appraised value of the home or the FHA maximum lending limit, which changes periodically.

According to the Consumer Financial Protection Bureau, you typically can take out up to 60% of your principal limit in the first year. However, if the amount you owe on an existing mortgage (or other required payments) is more than 60% of your principal limit, you can take out enough to pay off your mortgage (and any other required payments, including upfront loan fees) plus additional cash of up to 10% of your principal limit. 

You can choose how to receive the money. Here are a few choices:

• The line of credit option allows you to draw on your loan at the times and amounts that you choose, subject to the first-year draw limit and the overall principal limit. You will be charged interest only on the amount of money you take out.
• The monthly "tenure" option allows you to receive a monthly payout from your lender for as long as you maintain the mortgage.
• The fixed-rate loan option lets you receive your entire loan proceeds as a lump-sum payment. However, you will be able to access the amount permitted only under the first-year draw limits, so it may lead to a lower amount overall than other options.

​A reverse mortgage is a serious decision, and you should have all the facts about the loans before deciding on an HECM or other reverse mortgage product. Speak with a qualified financial professional.