Is a home equity conversion mortgage the same as a reverse mortgage? Not exactly. A Home Equity Conversion Mortgage is a type of reverse mortgage — just like a Kleenex is a type of facial tissue and a Jacuzzi is a type of hot tub.
The Federal Housing Administration (FHA) created the Home Equity Conversion Mortgage (HECM) back in 1988. You could think of a HECM as the FHA’s brand of reverse mortgage.
FHA backing gives HECM borrowers peace of mind. Other types of reverse mortgages have benefits, too.Check your reverse mortgage eligibility.
What is a reverse mortgage? A quick overview
A reverse mortgage is any loan for an older homeowner that doesn’t require a payment or a payoff until death — or until the homeowner moves out.
Some borrowers wonder: Can I really get paid for my home while also keeping my home? Doesn’t this sound too good to be true? Could it be a scam?
Like any financial product, reverse mortgages have downsides. And like any financial product, legitimate reverse mortgages can be imitated by scammers. But, as long as you’re working with a legitimate lender, you’re getting a legitimate loan.
As for the too-good-to-be-true question: Reverse mortgages don’t work by magic — they work by converting your home equity for cash. You’ll get cash. In exchange, the lender temporarily holds some of your home equity in the form of a loan.
Home Equity Conversion Mortgage vs reverse mortgage
All Home Equity Conversion Mortgages (HECMs) are reverse mortgages, but not all reverse mortgages are HECMs.
What makes a HECM different?
- FHA insurance: If your HECM balance ever grew larger than your home’s value, your FHA insurance would kick in to prevent you, or your heirs, from owing more money than you could make by selling the home. Not all reverse mortgages provide this security
- FHA loan limits: The FHA sets maximum loan sizes for its reverse mortgages. Current HECMs won’t top $1,089,300, even if your home is worth, say, millions; other reverse loan types could cash out more of your equity
- Other rules: The FHA won’t approve a HECM unless you’re 62; other reverse mortgages can approve younger borrowers. FHA also requires borrowers to complete counseling before applying
HECMs require more rules than many private loans, but they also have more built-in security for borrowers.
What all reverse mortgages help you do
You made house payments for years, growing the equity in your home. You own the home outright. Now, in retirement, you want to live in your home but also leverage it for a secure retirement.
With a reverse mortgage, you could:
- Receive cash from equity: This money can replace or supplement your income, but the money won’t be taxed as income, and they won’t affect Medicare or Social Security benefits
- Make no payments: If you’re alive and living in the home, you won’t have to make payments on the loan. The loan balance will come due when you move or pass away
- Qualify more easily: Credit and income rules are more relaxed since monthly payments won’t be required. Lenders will need to confirm you can afford to pay homeowners insurance and property taxes
- Stay in the home: Yes, you’re liquidating the equity you’ve built up. The lender will put a lien on your house. But you retain the deed and the exclusive right to live in the home
- Preserve retirement assets: A reverse loan could pay off debt or supplement your living expenses, helping you keep other retirement funds invested and growing in the market longer
All reverse mortgages, not just HECMs, offer these advantages.See if a reverse mortgage is right for you.
What FHA’s Home Equity Conversion Mortgages help you do
HECMs — the FHA’s version of the reverse mortgage — create all the advantages listed above. They also:
- Are less risky: HECMs are non-recourse loans. This means you’ll never owe more than your home’s value. You, or your heirs, should always be able to sell the home to pay off the HECM’s balance if you need to
- Allow payments: You won’t have to make payments, but you can make payments. Some borrowers like to pay fees and interest to limit loss of equity. This is a great idea if you keep the loan for years
- Offer more payout options: You can receive monthly payments, a lump sum of cash, a line of credit, or a combination of the three
Some, but not all, proprietary reverse mortgages offer some of these features. Since HECM lenders have to follow the FHA’s rules, borrowers can know what to expect no matter which FHA lender they use.
Advantages of a non-FHA proprietary reverse mortgage
Proprietary reverse mortgages, those not backed by the FHA, can provide more flexibility.
With a proprietary loan, you could:
- Qualify at a younger age: Some reverse mortgage lenders approve borrowers as young as 55. Borrowers must be 62 to get a HECM
- Qualify for a larger loan: Some proprietary lenders can approve larger reverse mortgages, allowing access to more equity
- Qualify with less equity: Still have a substantial balance on your first mortgage? A proprietary reverse mortgage could pay it off while cashing out the rest of your equity
- Pay no FHA insurance premiums: That FHA insurance that protects HECM borrowers? Borrowers pay for it. Right now that means paying 2% upfront and 0.5% annually. Proprietary loans can charge lower fees
A proprietary loan’s looser regulations can be good or bad, depending on the loan and the borrower. It’ll be up to you, the borrower — along with your financial advisor or retirement planner — to know the difference.
Advantages of a third type: Single-purpose reverse mortgage
Single-purpose reverse mortgages offer a third option that can meet some borrowers’ needs.
Instead of borrowing cash to use for any purpose, single-purpose loans harness your home equity to pay for one thing — like keeping your property taxes and homeowners insurance up to date.
This type of loan’s advantages include:
- Less equity use: With a single-purpose loan, you’re much less likely to run out of home equity and leave your heirs with a large loan balance on the home
- Lower interest rates: Since these loans tend to be smaller and less risky to lenders, interest rates tend to be lower
- Easier qualification: You won’t be receiving cash from the loan, so single-purpose reverse mortgage lenders won’t need to check your personal finances as closely
For some homeowners, this type of reverse mortgage provides a nice in-between: A way to relieve financial stress without over-taxing equity.
What is a Home Equity Conversion Mortgage vs a home equity loan?
Home Equity Conversion Mortgages and home equity loans have a lot in common: They both borrow cash against the equity you’ve already built up in the home.
The key difference?
- Home equity loans require monthly payments: As you make regular payments, a home equity loan’s balance will decrease. As the loan’s balance goes down, you’ll gradually regain the equity
- A HECM will not require a monthly payment: Unless you make optional payments, the loan’s balance can increase as interest charges and/or fees add up
Other differences include:
- Rates: Most home equity loans charge a fixed interest rate and fixed payments; most HECMs and other reverse mortgages have variable interest rates
- Fees: Typical home equity loan fees will be lower than typical reverse mortgage fees
- Age restrictions: Reverse mortgages, including HECMs, work only for older adults; home equity loans work for anyone who has home equity
- Residence requirements: To get a reverse mortgage, especially a HECM, you’ll need to use the home as your primary residence. You could get a home equity loan on a second home or investment property
HECM or proprietary reverse mortgage?
Stressed about how long your retirement funds will last? A reverse mortgage could trade some of your home equity for cash.
For 35 years, Home Equity Conversion Mortgages from the FHA have made reverse mortgages less risky for borrowers. Still, some homeowners prefer the flexibility of a proprietary loan.
If you need help finding the right loan, a loan officer can help sort your options.See if a reverse mortgage can help in retirement.