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How Does a Home Equity Conversion Mortgage (HECM) Work?

A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that allows homeowners 62 years of age or older to convert a portion of their home equity into cash. It is a loan that does not require monthly mortgage payments, and the proceeds can be used for any purpose, such as paying for healthcare expenses, home improvements, or supplementing retirement income.

HECMs are insured by the Federal Housing Administration (FHA) and are available through FHA-approved lenders. To qualify for a HECM, the borrower must own the home outright or have a low mortgage balance that can be paid off at closing with proceeds from the HECM loan. The borrower must also meet certain financial criteria and attend a counseling session with a HUD-approved counselor.

One of the unique features of a HECM is that the loan balance increases over time, as interest and mortgage insurance premiums are added to the outstanding balance. However, the borrower or their heirs will never owe more than the value of the home at the time of sale.

HECMs come in two types: the HECM Standard and the HECM Saver. The HECM Standard has a higher upfront mortgage insurance premium, but a lower annual mortgage insurance premium. The HECM Saver has a lower upfront mortgage insurance premium, but a higher annual mor