How a HECM Works


To fully enjoy their retirement years, some retirees may need extra cash. Whether the money goes to paying medical debt, helping a grandchild with college tuition, a much-needed vacation, or a variety of other reasons, a home equity conversion mortgage (HECM) might be the answer. But its critical that borrowers understand how a HECM works, and how a HECM might impact their retirement situation.

What Is a HECM?

A HECM, or home equity conversion mortgage, is a reverse mortgage, allowing you to stop making monthly mortgage payments and tap into the equity in your home. However, you still must pay for things like homeowner’s insurance, property taxes, and other expenses outlined in the terms of the loan, and you must maintain the home.

This loan is the most prevalent type of reverse mortgage and one insured by the Federal Housing Administration (FHA).

Is a HECM Right for You?

How do you know if this type of reverse mortgage could be a fit for you? First, review some of the HECM requirements to see if you meet them all. 

  • You must be 62 years or older.
  • You must reside in the home as your main residence.
  • You must own the home.
  • You must not have delinquent debts owed to the federal government.
  • You must keep paying your property taxes, homeowners’ insurance, any Homeowners Association (HOA) fees, and maintain the upkeep of your home.
  • Your home must be a single-family home, a 2–4-unit home (and you live in one of the units), a HUD-approved condominium, or a HUD-approved manufactured home. Most mobile homes don’t qualify. A single-unit condominium is allowed by HUD if the unit meets FHA requirements and the borrower meets certain other prerequisites.

How a HECM Works

After checking off the conditions above, you’ll want to know how much you can borrow with a HECM.

The amount available to you depends on:

  • The age of the youngest borrower or a qualified non-borrowing spouse.
  • The current interest rate.
  • Whichever of the following is less—the appraised value of your home or the HECM limit of $1,149,825.

Certain fees and costs must be paid by you, including:

  • Mortgage insurance premiums (upfront and annual).
  • Third-party fees like appraisals, title searches, surveys, inspections, etc.
  • Origination fee, which is capped at $6,000.
  • A servicing fee paid to the lender for the tasks they undertake regarding your loan.
  • Interest.

You can pay HECM costs from the proceeds of your loan, which means you won’t have to come up with any cash at closing. When you do that, it decreases the amount of money available to you.

How to Apply for a HECM

First, you must schedule mandatory reverse mortgage counseling with an approved counselor to see if the HECM will work for you.

A counselor will explain the program’s requirements, potential loan payment options (lump sum, equal monthly payments, or a line of credit), the approval process, and conditions that would require repayment of the loan. When you’ve completed the counseling, you should have enough information to make an informed decision on whether or not the HECM will work for you.

A HECM can be a powerful financial tool that gives you access to your home’s equity. Be sure to consult with a financial professional to make sure this is the right option for your specific situation.

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