Are HECM Loans a Good Idea? What to Consider First

A Home Equity Conversion Mortgage (HECM) is a specialized type of reverse mortgage insured by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD). This loan allows homeowners aged 62 or older to convert a portion of their home equity into usable funds. The primary purpose of a HECM is to provide financial flexibility during retirement, enabling access to home equity without requiring monthly mortgage payments. A HECM is a loan secured by the home, and the borrower retains ownership of the property.

Understanding HECM Loans

HECM loans function differently from traditional forward mortgages. Borrowers do not make monthly mortgage payments to the lender. Instead, the lender disburses funds to the homeowner, and the loan balance grows over time due to accrued interest and fees. Repayment of the loan is deferred until a specific event occurs, such as the last borrower selling the home, permanently moving out, or passing away.

A significant feature of HECM loans is their “non-recourse” nature. This means the borrower or their heirs will never owe more than the home’s value or the loan balance, whichever is less. This protection ensures that if the home’s value declines below the loan balance, neither the borrower nor their estate is personally liable for the difference. The FHA insurance program, funded by mortgage insurance premiums paid by borrowers, provides this safeguard, protecting both the lender and the borrower. This insurance also guarantees that loan disbursements will continue even if the lender experiences financial difficulties.

Eligibility for HECM Loans

To qualify for a HECM loan, both the borrower and the property must meet specific criteria. The borrower, or the youngest borrower in the case of multiple borrowers, must be at least 62 years old. The home must be the borrower’s primary residence, meaning they occupy it for the majority of the calendar year. Borrowers also need to either own the home outright or have a low enough existing mortgage balance that it can be paid off with the HECM proceeds.

Lenders conduct a financial assessment to ensure the borrower can meet ongoing property charges, such as property taxes, homeowner’s insurance premiums, and home maintenance costs. This assessment helps determine the borrower’s capacity to uphold these crucial obligations. Before applying, prospective borrowers are required to attend a counseling session with an independent, HUD-approved counselor. This mandatory counseling ensures individuals fully understand the loan’s terms, costs, and implications, as well as potential alternatives.

Eligible property types include single-family homes, or multi-unit homes (2-4 units) where one unit is occupied by the borrower. FHA-approved condominiums and manufactured homes that meet specific HUD standards are also permissible. Properties used for vacation or as secondary residences, or those on income-producing land like farms, do not qualify.

Accessing Loan Funds

HECM borrowers have several options for receiving their loan proceeds, offering flexibility to suit individual financial needs.

Disbursement Options

Single Lump Sum: Typically chosen for fixed interest rate HECMs, all available funds are received at closing. There are limitations on the initial amount that can be disbursed, generally capped at 60% of the principal limit or the amount needed to pay off mandatory obligations plus an additional 10% of the principal limit, whichever is greater.
Line of Credit: Provides access to funds as needed, often with a variable interest rate. A notable benefit of the HECM line of credit is that the unused portion grows over time, increasing the available funds for future use.
Tenure Payments: Provide equal monthly payments for as long as at least one borrower lives in and occupies the home as their principal residence.
Term Payments: Offer fixed monthly payments for a specific period chosen by the borrower.
Combined Methods: Borrowers can combine these methods, such as taking an initial lump sum and then having access to a line of credit or monthly payments.

In some cases, funds may be set aside at closing for future property taxes and insurance, particularly if the financial assessment indicates this is necessary to ensure the borrower can meet these ongoing obligations.

Costs of a HECM Loan

HECM loans involve various fees and charges, which can often be financed into the loan, reducing out-of-pocket expenses at closing.

Loan Costs

Upfront Mortgage Insurance Premium (UFMIP): A significant upfront cost, typically 2% of the home’s appraised value or the FHA maximum claim amount, whichever is less. For 2025, the maximum claim amount is $1,209,750. This premium helps protect both the borrower and the lender.
Annual Mortgage Insurance Premium (MIP): Charged at 0.5% of the outstanding loan balance. This ongoing fee accrues monthly and is added to the loan balance, becoming due when the loan is repaid.
Origination Fee: Lenders charge an origination fee for processing the loan, which is capped by the FHA. The fee cannot exceed $6,000, and is generally calculated as 2% of the first $200,000 of the home’s value plus 1% of the amount over $200,000, or $2,500, whichever is greater.
Servicing Fees: May be charged monthly, typically ranging from $30 to $35, to cover the management of the loan. These fees can be added to the loan balance.
Third-Party Closing Costs: Similar to traditional mortgages, these include appraisal fees (often $600-$1,000), title insurance, recording fees, and credit report fees.
Counseling Session Fee: The mandatory HECM counseling session also has a fee, commonly around $125, though some agencies may waive it based on income.
Interest: Accrues on the loan balance, increasing the total amount owed over time. Fixed interest rates are available for lump sum disbursements, while variable rates are common for lines of credit and monthly payment options.

Ongoing Borrower Obligations

After a HECM loan is disbursed, borrowers have specific ongoing responsibilities to keep the loan in good standing and prevent it from becoming due and payable.

Key Obligations

Property Taxes: A primary obligation is the timely payment of all property taxes. Failure to pay property taxes can lead to default.
Homeowner’s Insurance: Borrowers must also maintain adequate homeowner’s insurance coverage on the property. This insurance protects the home from damage and is a continuous requirement.
Home Maintenance: Maintaining the home in good repair is another important duty. Borrowers are expected to ensure the property does not deteriorate, and any necessary repairs must be completed to avoid potential default.
Primary Residence: The home must remain the borrower’s primary residence throughout the loan term. An extended absence from the home, typically exceeding 12 consecutive months, can trigger the loan to become due and payable, even if the absence is due to health reasons like moving to a nursing home.

Failure to meet any of these ongoing obligations—paying property taxes, maintaining insurance, keeping the home in good repair, or living in it as a primary residence—can result in the loan going into default. If a default occurs and is not cured, the lender may initiate foreclosure proceedings to satisfy the loan balance.

Loan Maturity and Repayment

A HECM loan becomes due and payable upon the occurrence of certain triggering events. The most common events include the death of the last surviving borrower or eligible non-borrowing spouse. The loan also matures if the last borrower permanently moves out of the home, such as selling the property or relocating to another residence. An absence from the home for more than 12 consecutive months, even for medical reasons, can also cause the loan to become due. Additionally, failure to meet the ongoing borrower obligations, such as not paying property taxes or insurance, or not maintaining the home, can lead to the loan being called due and payable.

Once the loan matures, the total balance, which includes the original principal, accrued interest, and mortgage insurance premiums, becomes immediately payable. The loan balance grows over time because interest and MIP are added to it.

Heirs of the borrower typically have several options to satisfy the loan and retain the property. They can choose to pay off the loan balance, which includes the principal, accrued interest, and MIP, and keep the home. Alternatively, they can sell the home, using the proceeds to repay the loan. Due to the non-recourse feature, heirs are not personally liable for any deficiency if the home’s sale price is less than the loan balance. In such cases, the FHA insurance covers the difference, ensuring heirs will not owe more than the home’s value. Heirs also have the option to deed the home to the lender to satisfy the loan obligation.