What is a Home Equity Conversion Mortgage?

A home equity conversion mortgage (HECM), also known as a Reverse Annuity Mortgage is a kind of reverse mortgage indemnified by the Federal Housing Administration (FHA). Home equity conversion mortgages let senior citizens liquidate their held assets by borrowing cash through mortgaging their homes, the value of the loan being conditional on the current appraised value of the property. Also, since this is a strictly senior citizen only arrangement, borrowers need to be at least 62 years old. Although interest rates still apply to the outstanding balance of such loans, no actual repayment is necessary on the part of the borrower. It is only when the borrower dies or the property is sold when the outstanding loan amount needs to be paid in its entirety. However, service and closing fees are still applicable during the term of the loan.

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How Does a Home Equity Conversion Mortgage Work?

As with other reverse mortgages offered by private entities, HECMs are quite common among senior citizens. However, reverse mortgages provided by banks usually permit sanctioning of loans of higher value along with lower fees and other costs. On the other hand, home equity conversion mortgages usually offer lower interest rates. Market competition has resulted in private banks offering borrowers reverse mortgages with offers and conditions that closely match HECMs. It all boils down to the borrower to select a mortgage that is best suited to his/her age, life expectancy and future plans for the property in question. Seniors also opt for an HECM in lieu of a home equity loan to avoid having to pay monthly installments in the case of the latter type of reverse mortgage.

Eligibility Criteria for an HECM

The Federal Housing Administration not only endorses the HECM but also facilitates insurance coverage of the mortgage. Besides, it also decides the eligibility criteria for the loans and chooses banking partners to disburse them. The process of approval of a HECM is clear and simple. Approval is subject to the fulfillment of the following preconditions: 1. The borrower must be at least 62 years old at the time of application. 2. The borrower must possess a property that has previous mortgages considerably paid off. 3. The borrowers financial condition must be sound and he/she should have an amicable risk profile. 4. The property's collateral value should meet or surpass the minimum acceptable limit as set by the FHA.