Home Equity Conversion Mortgage
HECM (pronounced HEKUM) is the commonly used acronym for a Home Equity Conversion Mortgage, a reverse mortgage created by and regulated by the U.S. Department of Housing and Urban Development.
A HECM is not a government loan. It is a loan issued by a mortgage lender but insured by the Federal Housing Administration, which is part of HUD.
FHA collects a Mortgage Insurance Premium (MIP) at closing that equals two (2) percent of the home’s appraised value or FHA lending limit ($726,525), whichever number is less. FHA also collects an annual premium equal to 0.5 percent of the outstanding loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment, and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund pays off the remaining balance.
Currently, HECMs make up most reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receives third-party counseling.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are privately insured by the mortgage companies that offer them. They are not subject to all the same regulations as HECMs, but as a standard best practice, most companies that offer proprietary reverse mortgages emulate the same consumer protections that are found in the HECM program, including mandatory counseling.
Proprietary reverse mortgages can meet the needs of older homeowners whose properties are ineligible for FHA financing — such as units in non-FHA approved condominiums or some planned unit developments (PUDs) — or if their home values exceed $1 million.
These loans are sometimes referred to as “jumbo” reverse mortgages because the borrowers may be eligible for more proceeds than they would be with an FHA-insured HECM.