Home Equity Conversion Mortgage
A home equity conversion mortgage (HECM) is a type of mortgage available to those 62 and older. This type of mortgage allows borrowers to access the equity they have built up in their homes, now, and defer payments of the loan until this home is no longer their primary residence. Because there are no required mortgage payments on a HECM, the interest is added to the mortgage balance each month. The rising loan balance can eventually grow to exceed the value of the home, specifically in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower's estate) is generally not required to repay any additional loan balance in excess of the value of the home. Although there are no monthly principal and interest payments, borrowers must continue to pay their property taxes and property insurance premiums.
In many cases, for a HECM to be a good fit for a borrower, their first mortgage balance is paid off, or only a very small balance remains. Often, if a balance on the first mortgage remains, this balance is paid off from the proceeds of the HECM. A borrower can access proceeds from a HECM in several ways, equal monthly payments, a line of credit or a combination of the two.
With the increase in home values many borrowers have been able to purchase their new home with a HECM, allowing them to retain excess liquidity without being required to make a principal and interest payment.
Requirements for a HECM:
- Borrowers must be at least 62 years of age.
- Home used as collateral for the mortgage must be the borrower's primary residence.
- Borrower must own the home out right or have a very small mortgage balance that will be paid off with the reverse mortgage at closing.
- Borrower must continue to pay for their property taxes and insurance premiums.
