HECM Loans vs. Reverse Mortgages: The Key Differences

What’s the first thing that comes to your mind when someone talks to you about a Home Equity Conversion Mortgage (HECM)? You might think, "Oh, they’re probably talking about reverse mortgages!"

But did you know that they’re not alike? Yes, they’re two different things with just a few similarities. But today, we're going to highlight the factors that set them apart from each other. Let’s go…

HECMs & Reverse Mortgages: How Do They Work?

First up, let’s look at Home Equity Conversion Mortgages (HECMs)!

• HECMs are one of the most sought-after types of reverse mortgages for seniors. They are insured by the Federal Housing Administration (FHA), allowing homeowners who are at least 62 years old to tap into their home equity for cash.

• Unlike traditional loans where you make monthly payments, with a HECM, you don't have to make monthly mortgage payments anymore. Instead, the loan pays off your existing mortgage (if you have one that’s still unpaid), and you can use the remaining money for anything you need.

Now, let’s pause the chat about HECMs and dive into reverse mortgages.

• They are not insured by the FHA and are available for homeowners aged 55 or older. Also, you should know that a HECM is a type of reverse mortgage. The general idea of a reverse mortgage is to provide senior homeowners with funds when they need to use their home’s equity.

• The other types of reverse mortgages include proprietary and single-purpose. Out of these, a Home Equity Conversion Mortgage is most commonly used by homeowners aged 62 and older.

Is HECM the New Reverse Mortgage?

You might have heard people talking about HECMs as if they're the new version of reverse mortgages. Well, there's some truth to that, especially considering they're favored by many homeowners aged 62 and older.

Since these home loans for seniors are insured by the FHA, they come with many benefits, making them highly attractive to retirees who want financial flexibility without worrying too much about risks. So while HECMs might not entirely replace traditional reverse mortgages, they're certainly worth considering if you're looking for a safe way to tap into your home's equity.

Home Equity Conversion Mortgage Vs. Reverse Mortgage

When it comes to mortgages, people today have a hefty chunk of options to consider, and without a comparison, it's almost impossible to understand how each mortgage fits right for us. So here are some of the main differences between HECM and reverse mortgages.

Aspect	Home equity conversion mortgage (HECM)	Reverse Mortgage
Minimum Age of the Borrower	HECMs require borrowers to be at least 62 years old to qualify.	Reverse mortgages set the minimum age at 55 for eligibility.
Duration of Line of Credit	Provides borrowers with a lifelong line of credit option.	Typically offer a line of credit term of 10 years.
Growth Potential of Line of Credit	HECMs may allow for the line of credit to grow over time.	They do not typically offer growth for the line of credit.
Income Eligibility Requirements	There are flexible income requirements, making them accessible to many.	Reverse mortgages also have relaxed income criteria for eligibility.
Monthly Payment Options	Both HECMs and reverse mortgages offer the choice of $0 monthly payments.
Closing Costs	HECMs may involve standard closing costs.	Reverse mortgages often feature low or no closing costs.
Interest Rates Are Variable/Fixed	Both HECMs and reverse mortgages offer fixed interest rate options.

Why Is HUD Counseling a Vital Step in the Process?

Although other types of reverse mortgages aren’t directly approved by the Federal Housing Administration (FHA), every borrower still goes through the process of HUD counseling. It’s one of the prime steps in a reverse mortgage application.

This counseling session is conducted by a designated HUD-approved counselor who ensures that borrowers understand all about the costs, benefits, and obligations associated with reverse mortgages.

HUD Counselors don’t just highlight the best parts of reverse mortgages, they also clarify the potential risks and responsibilities present in the loan, empowering borrowers to weigh the pros and cons effectively.

Remember that this session is there only to protect you from potential pitfalls and scams prevalent in the reverse mortgage market. So, attend it with confidence!

A Note on HECM Borrowing Limits, Additional Costs, and Fees

HECM Borrowing Limit -

• The maximum loan amount you can get with a Home Equity Conversion Mortgage (HECM) is based on typical FHA loan limits. However, your individual loan amount is influenced by factors like your age and current interest rates when you apply.

Additional Costs, and Fees -

• Apart from the origination fee, which is typically around 1-2% of the loan amount and can be added to your loan balance, there may be other additional fees such as appraisal, recording, and title search fees.

• These fees may vary between lenders and can either be added to your loan or paid out of pocket at closing. It's crucial to compare costs from different lenders to ensure you're getting the most favorable terms.

The Final Word: HECM or Reverse Mortgage

Reverse mortgages, regardless of the type you apply for, are very useful for retirees. HECMs come with set terms and FHA protection, which can be reassuring, while reverse mortgages offer more flexibility to fit your needs, even at the age of 55 without the need to wait until your 62nd birthday.

At the end of the day, it boils down to what suits you best. Your personal situation, financial goals, and how much risk you're comfortable with should guide your choice. And remember, a HUD-approved counselor and a loan officer are there to lend a hand to help you make smart moves.