Reverse Mortgage vs. HECM

Reverse Mortgage

A reverse mortgage is a lot like any other loan. The major difference is that you determine when and how you want to pay it. You can continue to make regular monthly payments, or you can choose to reduce or eliminate your payment. Unlike a traditional mortgage, you can skip a month and not face any delinquent or derogatory marks on your credit, and you won’t incur any penalty. However, you still have to maintain your property, pay homeowners insurance, and property taxes. The loan only comes due when the last borrower leaves the home.

Home Equity Conversion Mortgage (HECM) is the only type of reverse mortgage that is federally insured. These loans are only available through an FHA-approved lender and are subject to the federal lending limit. It accounts for about 90% of all reverse mortgages originated in America.

A traditional reverse mortgage, on the other hand, can be through any lender. Before acquiring one, you will be required to undergo financial counseling with a third party, government-approved HECM counselor, to discuss your current financial situation and look at all of your available options.

Another type of reverse mortgage is a proprietary or ‘jumbo’ reverse. These products are designed and offered by individual lenders. They may make sense if you have a high-valued home so you can access a greater amount of equity. As of 2021, the federal lending limit was raised to $822,375, so you might consider a jumbo if your home is valued at or above that limit. Otherwise, the HECM is most likely the program for you.

The HECM is available to homeowners that are age sixty-two and older. You cannot be delinquent on any federal debt and it can only be used for your primary residence. Since you still own the home, you must undergo a financial assessment to determine your willingness and ability to meet your property tax and homeowners insurance obligations.

With nearly all reverse mortgage products, borrowers are not required to make any monthly mortgage payments. They also offer a larger advance, which makes them a great option for people who want to access more of their equity and convert it into cash.

In a proprietary mortgage, lenders are generally much more conservative in the terms they offer since they take on all the risk. That can mean higher interest rates and lower cash available relative to the home’s value when compared to the HECM.

With a HECM, the borrower’s credit score doesn’t impact interest rates. People with lower credit scores can apply and qualify for this loan. There are no required monthly mortgage payments on a HECM. A HECM has several different payment options available to borrowers.

Both HECM and Jumbo programs are a great way to access the equity in your home. With a HECM, you can receive proceeds as a lump sum, in a reserve as a line of credit, or as a fixed monthly payment to supplement your income. Because a Jumbo is unique to a specific lender, they may have stricter constraints on the ways can access that equity.

Mortgages are complicated. That’s why working with a broker is so important. At South River Mortgage we work with all major lenders to find the best terms for your needs, not the bank’s.