Home Equity Conversion Mortgage

A home equity conversion mortgage (HCEM) is the federal Housing and Urban Development authority’s reverse mortgage program for senior citizens. Essentially, a home equity conversion mortgage allows you to withdraw some of the equity in your home to be used as income. Your payments can come as monthly payments for life, in a lump sum or as a line of credit.

Home Equity Conversion Mortgage Eligibility

In order to qualify for a home equity conversion mortgage, the borrower must be 62 years old, use the home being mortgaged as their primary residence and receive HUD-approved reverse mortgage counseling to ensure that they understand the process and their options. Furthermore, you must own your home free and clear, or have a mortgage balance low enough that the proceeds from the home equity conversion mortgage will cover the outstanding amount left on the mortgage. You can only have one home equity conversion mortgage at a time.

How Much Are Home Equity Conversion Mortgage Payments?

The amount of money you’ll receive from a home equity conversion mortgage depends on your age, the interest rate you receive and the value of the home, less origination fees and mortgage insurance premiums. Furthermore, there are four different ways you can receive proceeds from your home equity conversion mortgage, which will also affect how much money you receive over the life of the reverse mortgage:

Tenure - Fixed monthly payments for as long as the occupant lives
Term - Monthly payments for a fixed term (payments are usually higher than with tenure)
Line of credit - The borrower can make withdrawals up to a certain limit (much like a credit card or home equity line of credit)
Lump sum - The borrower receives a single upfront payment

You can also combine a tenure or term payment with a line of credit. The maximum amount you receive depends on your geographic area.

Origination Fees and Mortgage Insurance Premiums

The costs of a home equity conversion mortgage include origination fees, which can amount up to $2,500 for homes appraised at less than $125,000 (for homes valued over $125,000, lenders can charge 2 percent for the first $200,000 and then 1 percent of the amount over $200,000) and mortgage insurance premiums (MIP). When you originate the loan, you’ll have to pay an upfront mortgage insurance premium and an annual premium of 1.25 percent of the mortgage balance per year. For the Home Equity Conversion Mortgage Standard option, the upfront MIP is 2 percent. For the HCEM Saver Option, the upfront MIP is .01 percent.

Repaying the Loan

The loan does not become due until the borrower passes away or moves out of the home. The home remains the property of the borrower, regardless if the outstanding mortgage balance exceeds the value of the home. When the HECM loan becomes due, the borrower (or the heirs) must pay the balance remaining on the mortgage, which can typically be done by selling the home. If the outstanding balance exceeds the value of the home, the borrower does not have to pay more than the value of the property if it is sold.

Applying for a Home Equity Conversion Mortgage

Although HECM reverse mortgages are backed by the federal government, you apply for home equity conversion mortgages through normal lenders, banks and credit unions. Simply look for a mortgage lender or mortgage broker who is an FHA HECM approved lending institution.