Home Equity Conversion Mortgage (HECM): Meaning & Limitations
- Emily Sterling
- 8 hours ago
- 2 min read
A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA). It allows homeowners aged 62 and older to convert part of the equity in their home into cash without selling the property or making monthly mortgage payments. Instead, the loan is repaid when the borrower moves out, sells the home, or passes away.
Unlike traditional mortgages, HECMs are designed to help retirees access home equity for expenses like healthcare, home improvements, or supplementing retirement income all while remaining in their homes.
How a HECM Works
HECMs allow eligible homeowners to receive payments in several forms: a lump sum, monthly installments, a line of credit, or a combination. The borrower continues to own the home and must keep up with property taxes, homeowners insurance, and maintenance. Interest accrues on the loan balance over time, and repayment is deferred until a qualifying event triggers loan payoff.
The total amount you can borrow depends on your age, the home's value, interest rates, and FHA lending limits. Importantly, the loan is non-recourse, meaning the borrower (or their heirs) will never owe more than the home’s market value at the time of repayment.
Limitations and Requirements
While HECMs can offer financial flexibility, they come with specific limitations:
Age and residency: Only homeowners aged 62+ living in the property as a primary residence are eligible.
FHA-approved property: The home must meet FHA standards and pass an appraisal.
Costs: HECMs include upfront fees, mortgage insurance premiums (MIP), and closing costs, which can reduce the net proceeds.
Loan balance grows: Since no monthly payments are required, the loan balance increases over time, reducing home equity.
Impact on inheritance: Because the loan is repaid from the sale of the home, heirs may receive little or no inheritance unless they repay the loan themselves.
Borrowers must also undergo HUD-approved counseling to understand the terms and implications before closing the loan.
Real-World Example
Imagine a 70-year-old homeowner with a $500,000 fully paid-off home. She qualifies for a HECM and chooses to receive $200,000 as a line of credit. She uses part of it for home renovations and keeps the rest for emergencies. Over time, interest accrues on the borrowed amount, but she remains in her home without making mortgage payments.
Years later, when she passes away, her heirs decide to sell the home. If the loan balance has grown to $230,000 and the home sells for $250,000, the loan is repaid in full, and the heirs keep the remaining $20,000. If the home sells for less than the loan balance, FHA insurance covers the difference.
Final Thoughts
A Home Equity Conversion Mortgage (HECM) can be a powerful financial tool for older homeowners needing liquidity while aging in place. However, it's not a one-size-fits-all solution. It reduces future equity and can affect what you leave behind for heirs. Homeowners considering a HECM should carefully evaluate their needs, talk with a HUD counselor, and understand all the terms before proceeding. Used strategically, a HECM can turn your home into a resource that supports your retirement goals.
