What is the Difference Between a Reverse Mortgage & HECM?

There are some differences between the two, but the terms are rather interchangeable. While all HECMs are reverse mortgages, not all reverse mortgages are HECMs. Here’s a breakdown of the differences:

What is a Reverse Mortgage:

• • Definition: A reverse mortgage is a type of loan where the lender makes payments to the borrower using the equity of the borrower’s home as collateral. The loans are typically not repaid until the borrower moves out, sells the home, or passes away.
  • Types: There are several types of reverse mortgages:
    • HECMs (Home Equity Conversion Mortgages) – This is what most often is referred to as a Reverse Mortgage, but specifically a HECM is federally insured and regulated by HUD.
    • Proprietary reverse mortgages – Offered by private lenders, not insured by the FHA, and can be tailored to homes with higher values than the HECM limit or for those who don’t meet HECM eligibility criteria.
    • Single-purpose reverse mortgages – Offered by some state and local government agencies or non-profits, designed for a specific purpose, like home repairs.
  • Eligibility: Varies by the type of reverse mortgage but generally requires the homeowner to be of a certain age (usually 62 or older for HECMs), own their home outright or have a low mortgage balance that can be paid off with loan proceeds, and live in the home as their primary residence.
  • Regulation: Proprietary and single-purpose reverse mortgages have their own rules which can vary widely, whereas HECMs have standardized terms.

What is a Home Equity Conversion Mortgage(HECM):

• • Definition: HECM is a specific type of reverse mortgage insured by the Federal Housing Administration (FHA) under HUD.
  • Regulation: Since it’s federally insured, HECMs come with strict regulations regarding:
    • Eligibility: Borrowers must be 62 years or older, own property free and clear or nearly so, and live in the home as their primary residence.
    • Loan Limits: There’s a maximum claim amount set annually by FHA, which caps the loan size based on the lesser of the appraised home value or the FHA mortgage limit for the area.
    • Counseling: Mandatory counseling from a HUD-approved counselor to ensure borrowers understand the implications of taking out such a loan.
    • Insurance: An upfront and annual mortgage insurance premium is required to protect the lender against losses including if the home’s value drops below the loan amount.
  • Features: Offers various payment options like lump sum, tenure payments (monthly for life), term payments (monthly for a set period), or a line of credit. Also, unlike proprietary reverse mortgages, HECMs have a non-recourse feature, meaning the borrower or their heirs will never owe more than the home’s value at the time of sale, even if the loan balance exceeds this value.
  • Purpose: The HECM program was designed to provide seniors with a secure means to tap into their home equity while offering greater consumer protections compared to other reverse mortgage products.

Key Differences Between Reverse Mortgage & HECM:

• • Insurance: HECMs are insured by the FHA, providing additional security to both borrowers and lenders, but proprietary reverse mortgages are not.
  • Loan Limits: HECMs have a maximum claim amount set by HUD, while proprietary reverse mortgages can offer higher limits for more expensive homes.
  • Regulation and Oversight: HECMs have stringent federal oversight, ensuring a standardized product across the country, while proprietary products can have more flexible terms but less regulatory protection.
  • Eligibility: The eligibility criteria for HECMs are standardized, but proprietary reverse mortgages might have different criteria based on the lender’s policies.

In summary, while a HECM is a type of reverse mortgage with specific federal insurance and regulations, other types of reverse mortgages exist outside this framework, offering different terms, benefits, and risks.

Reverse mortgages can be a useful financial tool for eligible seniors looking to supplement income, pay for healthcare, or cover living expenses, but they also come with complexities that should be thoroughly understood before proceeding.

Learn more about eligibility requirements for a reverse mortgage, situations where a reverse mortgage is best used, and common myths around reverse mortgage that we debunk with facts