What Is The Difference Between A HECM Mortgage And A Reverse Mortgage?

The prices of food, services, and healthcare are up over 22% in the last four years. For seniors on a fixed income, a reverse mortgage can help cover these costs and give you peace of mind in your retirement years.

If you are starting to look at options, it might be confusing to hear different terms like home equity conversion mortgage (HECM), proprietary reverse mortgages, or even jumbo reverse mortgages. And, because HECMs are so common, you might think they mean the same thing as a reverse mortgage.

In reality, not all reverse mortgages are HECM loans, but they are the predominant loan type you'll find in the reverse mortgage market. This article covers the differences between home equity conversion mortgages and reverse mortgages to help you decide which is the right path for your needs.

Home equity conversion mortgage defined

An image representing the difference between HECM and Reverse Mortgage.

HECMs are always reverse mortgages. These loans fall under a specialized government-insured program regulated by the Department of Housing And Urban Development (HUD) and qualify for the Federal Housing Administration (FHA) insurance.

These loans give you a way to pull the equity out of your home now and push out all the borrowing costs until you sell or pass away. This means you don't pay closing costs, you don't have monthly payments, and you don't pay mortgage insurance premiums.

All of those costs get added to your loan balance and paid when it's time to close the loan. This is very different from a traditional mortgage, where you make regular monthly mortgage payments to pay off the debt.

Benefits of HECM loans

Out of each type of reverse mortgage, HECMs give you the most protection and benefits. Here's why:

Counseling session

HUD wants to make sure you understand all the details of a reverse mortgage before you sign the loan. That's why the agency requires you to go through a counseling session as part of your application process with a reverse mortgage lender.

What happens during this session? The reverse mortgage counselor reviews your situation and needs and covers your options. They'll ask questions or provide information like:

What are your plans for the loan?
How long do you plan to stay in your home?
Options for home improvements to stay in your home as long as possible.
If you've looked at alternatives like a traditional mortgage or home equity loan.

Non-recourse

Reverse mortgages through HUD also mean that your heirs have protection from future risk at loan payoff. If there's a situation where your house isn't worth the full amount of the loan when it's time to sell, HUD covers the difference.

Lender options

The federal government insures these loans, which increases lender participation and gives you access to more options and terms. This means you can shop around, look at rates, and find the best loan to support your situation. You also have protection from a lender going out of business because HUD steps in to transfer your loan to another financial institution.

Requirements for a home equity conversion mortgage

To get a home equity conversion mortgage loan under the HUD program, you'll need to meet these requirements:

Age: You must be age 62 or older.
Residence: The property getting the reverse mortgage must be your primary residence, and you'll need at least 50% equity in the home.
Property: Your property must be a single-family home, condo, manufactured home or multifamily property with up to four units as long as you live in one of them.
Finances: You need to be current on property taxes and not have any federal debt like unpaid taxes. You also need to show that you have the capability to pay property taxes, stay current on homeowners insurance and keep paying your HOA dues if applicable.

HECM loan payout options

Once the FHA-approved lender confirms and grants you the loan, you have a few different options:

Adjustable rate mortgages

If you decide to go with an adjustable-rate mortgage, you can choose from a few different options and combinations for your loan payout. One option is to receive monthly payouts for either the entire time you live in the property or for a fixed timeperiod.

You can also choose a line of credit option, which works very much like a traditional home equity line of credit. In this scenario, you draw against the line of credit when you need or want to. The amount of possible funds also adjusts over time, so as you build more equity, you'll have more funding available.

Equity conversion mortgages also allow you to combine options with modified tenure or term payments.

Fixed-rate mortgages and variations

For borrowers who choose a fixed-rate loan, your proceeds come in one lump sum. Note that with this payout type, you usually can't take all of the funds in your initial disbursement because most lenders cap it at 60%.

Other types of reverse mortgages

Reverse mortgages that don't fall under HUD's program include options like:

Single-purpose reverse mortgages

You'll find these reverse mortgages through state, local, and community assistance organizations. They can be a more cost-effective way to access funds from your home equity, but they aren't as common. This is because they aren't available everywhere and have restrictions on how you can use the funds.

You can apply for a single-purpose reverse mortgage for a lender-approved purpose, so you'll need to define your specific need ahead of time.

Proprietary reverse mortgages

A proprietary reverse mortgage loan is sometimes also called a jumbo reverse mortgage. As of 2024, the FHA program only covers loans up to $1,149,825, so if you need more than this, you'll fall under the category of a proprietary reverse mortgage.

Since these aren't part of the government program, you'll work with private lenders to secure your loan. They do have higher interest rates and the lender may not give you as much loan-to-value as you'd expect with an HECM.

Which reverse mortgage is best for you?

Since an HECM isn't the only reverse mortgage option available, here's a quick at-a-glance comparison of the various types:

Type of reverse mortgage	Program sponsor	Loan amount	Loan uses
HECM	Federal government	Up to $1,149,825	Multiple uses
Single-purpose	State, local, or community organization	Varies but less than HECM	Single purpose only, approved ahead of time
Jumbo	Private lenders	Varies, but more than HECM	Flexible

Final thoughts on HECM vs reverse mortgage

Reverse mortgages continue to grow in popularity and help offset higher costs of living, home modifications, and other expenses like medical bills. For the majority of borrowers, a HECM loan gives you the most flexibility and protection to support your long-term financial needs.

Differences in reverse mortgage types: FAQs

What makes the HECM program safer for borrowers than a traditional reverse mortgage?

The HECM program provides extra protections for borrowers like non-recourse loans. This means your heirs do not have to pay the difference between your property's sales proceeds and the loan balance. The mortgage insurance premiums cover this risk and cost if needed in the future.

Why do banks not recommend reverse mortgages?

Banks may encourage you to take out a home equity loan or traditional mortgage instead of a reverse mortgage because some of these loans might have lower upfront costs. The challenge is that you have to have a good credit score to qualify and you'll have to make monthly payments.

What is the downside of an HECM loan?

The downside is that your home equity decreases as your balance grows over time. These loans also might have higher costs than traditional mortgage loans.