Reverse Mortgage (HECM)
A reverse mortgage is a loan that allows homeowners aged 62 or older to convert a portion of their home equity into cash without making monthly mortgage payments. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration.
What This Means
How Reverse Mortgages Work
Unlike a traditional mortgage where the borrower makes payments to the lender, a reverse mortgage pays the borrower. The loan balance grows over time as interest and fees accrue on the disbursed amount. Repayment is deferred until the borrower sells the home, permanently moves out, or passes away. The borrower retains title to the property and remains responsible for property taxes, homeowners insurance, and maintenance. Failure to meet these obligations can trigger a loan default.
HECM Program Requirements
The HECM program, administered by HUD and insured by FHA, is the dominant reverse mortgage product. Borrowers must be at least , occupy the property as their primary residence, and participate in a HUD-approved counseling session before applying. The amount available depends on the borrower's age, current interest rates, and the home's appraised value, subject to the FHA lending limit of . Payout options include a lump sum, monthly payments, a line of credit, or a combination.
Costs and Protections
HECM borrowers pay an upfront mortgage insurance premium of of the home's appraised value (or the FHA limit, whichever is less), plus an annual MIP of of the outstanding loan balance. Origination fees, closing costs, and servicing fees also apply. A critical protection is the non-recourse feature: borrowers and their heirs will never owe more than the home's fair market value at the time of repayment, regardless of the loan balance.