Home Equity Conversion Mortgage vs Reverse Mortgage
There are numerous reasons why you might need to convert your home’s equity to cash—to finance repairs or renovations, to pay off high-interest debt, or even to fund your retirement.
If you’re researching ways to turn your equity into cash, you might have come across two potential solutions—home equity conversion mortgages (HECMs) and reverse mortgages.
So, what do these options entail, and which one is right for you?
In this guide, we’re breaking down the similarities and differences between a home equity conversion mortgage vs reverse mortgage. We’ll also explore potential alternatives to these two solutions if you’re ineligible or if they’re not the right fit for your financial situation.
What is a Reverse Mortgage?
A reverse mortgage is a loan you take out against the equity in your home. Equity is easily represented by a simple equation:
- Write down your home’s market value.
- Subtract any outstanding mortgage loan balance.
- The resulting number equals your home equity.
But home equity isn’t a liquid asset—it’s typically only accessible if you sell your home. Reverse mortgages solve this problem by lending homeowners cash up to the maximum value of their existing equity.
Factors to Consider for Reverse Mortgages
Before you start furiously filling out reverse mortgage applications, it’s important to gather all the reverse mortgage facts. Consider the following:
- Reverse mortgage payments don’t need to be made until the homeowner sells their home, the homeowner moves into a new primary residence, and/or the homeowner dies.
- Applicants typically must have at least 50% of their home’s value in equity.
- Applicants must be 62 or older.
- Reverse mortgage borrowers must pay mortgage insurance to reduce their lenders’ risks.
In addition, you’ll want to understand that there are different types of reverse mortgages:
- Home equity conversion mortgages (HECMs), which we’ll discuss in the next section.
- Jumbo reverse mortgages, which allow homeowners to borrow more than federally-regulated limits, decrease the minimum age for borrowers, and are subject to more variable terms, interest rates, and other conditions.
- HECM for purchase loans, which provide a reverse mortgage only for the purpose of buying a new home.
If you’re struggling to get a reverse mortgage with bad credit, you may want to look for other options.
What is a Home Equity Conversion Mortgage (HECM)?
A home equity conversion mortgage (HECM)—sometimes called an FHA reverse mortgage—is a specific type of reverse mortgage loan that’s insured by the federal government. HECM reverse mortgage loans are offered through the Federal Housing Administration (FHA), a division of the US Department of Housing and Urban Development (HUD).
HECMs are the only federally-protected and FHA-insured reverse mortgage solution available, so it’s often the most financially stable reverse mortgage option for eligible borrowers.
FHA guidelines limit the loan amount you can take out through an HECM loan. These limits depend on:
- The value of the property being mortgaged
- The age of the borrower(s)
- Borrowers’ creditworthiness (credit score and credit report history)
Factors to Consider for Home Equity Conversion Mortgages
Like other reverse mortgages, you’ll want to be aware of all the details for HECMs. In addition to the limitations above, HECM borrowers must:
- Be at least 62 years of age
- Own the mortgaged property outright or have at least 50% in equity
- Not be delinquent on any federal debt, like income tax payments
- Be financially able to make ongoing payments for property taxes, insurance (both homeowners insurance and mortgage insurance premiums), HOA fees, and/or rash pickup and other utilities
- Enroll in an informational session with a HUD-approved HECM loan counselor
While there are many HECM benefits, the limitations may not allow you to pursue this option.
Home Equity Conversion Mortgage vs Reverse Mortgage: Which Should You Choose?
If you’re looking for a way to access your home’s equity, these two types of loans can be viable options. But how do you know which best meets your needs?
Let’s compare some of the key elements of a home equity reverse mortgage vs reverse mortgage.
For both loan types, borrowers must have:
- A minimum age of 62 years
- At least 50% equity ownership
- Financial stability to make ongoing maintenance payments
- Payment of fees for loan origination and closing costs
But there are also some key differences between these mortgage loan types. They include:
- Typical reverse mortgages and HECM loans place limits on the principal loan amount you can borrow, while jumbo reverse mortgages offer higher cash limits.
- The US Department of Housing and Urban Development offers HECMs at federally-established rates, while privately-acquired reverse mortgages can differ in interest rates and terms.
Fortunately, if you don’t meet the requirements for either loan, there are alternatives available.
HECM and Reverse Mortgage Alternatives
If you need access to equity or you’re undergoing financial hardship, HECM and other reverse mortgages aren’t your only option, as alternatives to reverse mortgage loans exist. You can also access your equity by:
- Selling your home
- Renting out your home and using rental income towards your monthly mortgage payments
- Using a sale-leaseback program
If the latter option is new to you, don’t worry. A sale-leaseback program is simple:
- You sell your home for a fair market price to a program provider.
- After the sale, the provider pays you in one lump sum.
- You can continue to live in your home for as long as you wish, making rent payments to the provider.
You can continue to rent your home indefinitely, which eliminates the need to move. When you’re financially prepared to buy again, you can take one of two routes:
- You can buy back your home from the program provider for fair market value.
- You can terminate your lease and purchase a different property.
A sale-leaseback program is an excellent option for homeowners with insufficient equity or who are too young to qualify for a reverse mortgage or HECM.
Skip Reverse Mortgages With a Sale-Leaseback
Converting your home equity can be a complicated process if you don’t qualify for a reverse mortgage or a home equity conversion mortgage from the FHA. However, there’s a solution for those who don’t want to move out of their homes.
With a sale-leaseback program, you can convert your home equity to cash with ease—and stay in your home.
Whether you’re planning for retirement, paying off credit card debt, funding a new property, or taking on another financial project, sale-leaseback programs makes it simple and affordable to convert your hard-earned equity into cash. Speak with a financial advisor to consider all of the financial solutions available to you.
Investopedia. Guide to Reverse Mortgages. https://www.investopedia.com/mortgage/reverse-mortgage/
Investopedia. Jumbo Reverse Mortgage. https://www.investopedia.com/jumbo-reverse-mortgage-5222279
US Department of Housing and Urban Development. Home Equity Conversion Mortgages for Seniors. https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome