Definition:
A Home Equity Conversion Mortgage (HECM) is a reverse mortgage loan backed by the Federal Housing Administration (FHA) that allows homeowners aged 62 or older to convert part of their home equity into cash without selling the home or making monthly mortgage payments.
Example:
Linda, age 70, owns her home outright. She wants to supplement her retirement income, so she applies for an HECM. She receives monthly payments from the lender based on her home’s value, and she doesn’t have to repay the loan until she moves out, sells the home, or passes away.
Explanation:
HECMs are designed to help senior homeowners access the equity they’ve built up in their homes. Instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the homeowner. These payments can be received as a lump sum, monthly income, a line of credit, or a combination of these options.
The homeowner keeps the title and is responsible for property taxes, insurance, and maintenance. The loan becomes due when the borrower sells the home, moves out permanently, or passes away. At that point, the home is usually sold to repay the loan. Any remaining equity goes to the homeowner or their heirs.
HECMs are federally regulated and include mandatory counseling to help borrowers understand the terms and responsibilities.
Why is Home Equity Conversion Mortgage (HECM) Important in Real Estate Transactions?
HECMs are important because they provide older homeowners with a way to access their home equity without selling their homes or taking on new monthly payments. For buyers and sellers, understanding HECMs is helpful during estate planning, inheritance, or when considering how to structure retirement funding. Real estate professionals should be familiar with HECMs to guide clients through these specialized transactions.