Reverse Mortgage vs HECM: What’s the Difference?

There are more than 32 million baby boomer homeowners and the number of seniors in the United States is expected to more than double in the next three decades. Couple that with the fact that only 11% of American retirees use their home equity as a source of retirement income and you’ve got a real problem that needs a real solution.

The reverse mortgage industry is an industry that’s guaranteed to continue growing as more of our baby boomers retire. Let’s explore two ways in which retired homeowners can access additional funds to comfortably enjoy their retirement years.

What’s a Reverse Mortgage?

A reverse mortgage is a type of home equity loan that was specifically designed for elderly homeowners. It’s a mortgage that allows the homeowner to borrow money against the value of their home. This type of loan does not require monthly mortgage payments and is typically repaid after the borrower moves out or becomes deceased.

Reverse mortgages were designed for senior citizens in the United States that are looking for ways to reduce debt, improve their quality of life, or cover emergency expenses. They work by allowing borrowers to use the equity tied up in their home without having to sell their home. The bank makes payments to the borrower based on a percentage of the accumulated home equity. Depending on a fixed-rate or adjustable-rate mortgage, you can receive the funds as a lump sum, fixed monthly payment, line of credit, or a combination of those options.

The three types of reverse mortgages are single purpose reverse mortgage, HECM and private proprietary mortgages. The most popular reverse mortgage is a HECM.

What’s a HECM?

A HECM, or Home Equity Conversion Mortgage, is basically the same thing as a traditional reverse mortgage, except it’s federally insured by the Federal Housing Administration (FHA). A Home Equity Conversion Mortgage allows seniors to convert the equity of their home into cash, where the total amount borrowed is based on the appraised value or the home and age of the borrower. Since the loan is insured by the FHA, the borrower will never owe more than the value of the loan.

What’s the Difference Between Reverse Mortgage and HECM?

There’s not a huge difference between the two mortgage options, but the most obvious difference is that HECM’s are federally insured. With a traditional reverse mortgage, the loan doesn’t have to be repaid until the homeowner is no longer living in the home; however, that means the loan balance grows over time. A Home Equity Conversion Mortgage is the most popular reverse mortgage program in the U.S. and borrowers can use the funds for the purchase a primary residence.

In order to qualify for either a traditional reverse mortgage or a HECM, the borrower must meet the following requirements:

  • Must be 62 years or older
  • Must occupy the home as their primary residence
  • Must own the property outright or have a small mortgage balance
  • Must not have any delinquent federal debts
  • Complete either HECM approved counseling
  • Proof of the the borrowers ability to financially maintain the property (insurance, taxes, HOA, and other charges and fee)
  • Property type must be a single family home, 1-4 unit home with one unit occupied by the borrower, HUD approved condominium, or a manufactured home that meets FHA requirements

Choosing the Best Mortgage Option

There are any factors to consider before choosing a mortgage product that best fits your needs. Although traditional mortgages aren’t federally insured, they are privately insured and still follow the same guidelines and requirements that HECMs are required to follow. In a nutshell, a reverse mortgage is a home equity loan and a HECM is also a reverse mortgage. Both options come with financial requirements such as the borrowers ability to pay the mortgage insurance premiums, third-party charges, origination and servicing fees, and proof of your ability to financially maintain the property. Visit today to speak with a licensed loan officer about your financial situation.