How HECM Loans Work and What You Need to Know Before You Apply

What a HECM loan is and how it works

A Home Equity Conversion Mortgage (HECM) is a reverse mortgage insured by the Federal Housing Administration. Instead of making monthly payments to a lender, the lender pays you — either as a lump sum, regular monthly payments, a line of credit you can draw from, or some combination. The loan is repaid when you sell the home, move out permanently, or pass away; your heirs then settle the debt from the sale proceeds or refinance it.

The amount you can borrow depends on your age, the current interest rate, and your home's value. The older you are, the more you can typically borrow. You keep the title to your home and remain responsible for property taxes, homeowners insurance, and maintenance — if you stop paying these, the lender can call the loan due.

HECM loans are federally regulated, which means there are rules about how much lenders can charge in fees and how they must disclose terms. This is different from proprietary reverse mortgages, which are not FHA-insured and have fewer protections.

Key Takeaways

• You must be at least 62 years old, own your home outright or have a small mortgage balance, and live in the home as your primary residence.
• The home must be a single-family house, a two- to four-unit property where you occupy one unit, a condo in an FHA-approved project, or a manufactured home built after 1976.
• You will attend a mandatory counseling session with a HUD-approved counselor before you can move forward, and this counselor is independent of the lender.
• Closing costs and fees are typically higher than a standard mortgage, and you will owe interest on the borrowed amount from the start.
• The loan does not become due as long as you live in the home and pay property taxes and insurance, even if the loan balance exceeds the home's value.

Age, home ownership, and residency requirements

You must be at least 62 years old. If you are married or in a registered domestic partnership, only one spouse needs to meet the age requirement, but both must be on the title. If only one spouse is 62 and the other is younger, the younger spouse can still be on the loan, but the loan terms will be based on the younger spouse's age.

You must own your home outright or have only a small mortgage balance remaining. If you have a mortgage, the HECM proceeds must be used to pay it off first — you cannot receive any funds until the existing debt is cleared. You must also live in the home as your primary residence. You cannot use a HECM on a vacation home or investment property.

You must continue to live in the home for the loan to remain active. If you move to a nursing home or assisted living facility for more than 12 consecutive months, or if you pass away, the loan becomes due. Some lenders allow brief absences — typically up to 12 months — but you should confirm this with your lender before you take out the loan.

Property types that may have access to

Your home must be a single-family house, a two- to four-unit property where you occupy one unit, a condo in an FHA-approved condominium project, or a manufactured home built after June 15, 1976. Co-ops and condos in non-approved projects do not may have access to.

If you own a condo, the project itself must be FHA-approved. You can search the FHA's approved condo list on their website, or your lender can check for you. If your condo is not on the list, you will not be able to get a HECM, though you may be able to get a proprietary reverse mortgage instead.

The home must meet FHA property standards. The lender will order an appraisal, and if the home needs repairs to meet those standards, you may be required to set aside funds from the loan proceeds to cover them before you receive any money.

The mandatory counseling session

Before you can close a HECM, you must complete a counseling session with a HUD-approved counselor. This counselor works for an independent agency, not the lender, and the session is free. The counselor will review the loan terms, explain alternatives to a reverse mortgage, discuss the financial implications, and answer your questions.

You can attend the session in person, by phone, or online, depending on what your counselor offers. The session typically lasts one to two hours. After the session, the counselor will give you a certificate of completion, which you must provide to the lender before closing. You cannot waive this requirement.

To find a HUD-approved counselor, visit HUD's website or call 1-800-569-4287. You can also ask your lender for a referral, but you have the right to choose your own counselor.

How much you can borrow

The amount you can borrow is calculated using your age, the current interest rate, and your home's appraised value. The older you are, the higher the percentage of your home's value you can borrow. At 62, you might borrow around 50 to 60 percent of your home's value; at 80, you might borrow 70 to 80 percent. These percentages change with interest rates and are not fixed.

The lender will order an appraisal to determine your home's value. You are responsible for the appraisal fee, which typically ranges from $300 to $500, though this varies by region and lender. If the appraisal comes back lower than you expected, your borrowing amount will be lower as well.

You can receive the funds as a lump sum, monthly payments for a set period or for as long as you live in the home, a line of credit you can draw from at any time, or a combination of these options. Each option has different costs and benefits, and your counselor can help you think through which makes sense for your situation.

Costs and fees you will pay

HECM loans typically cost more than a standard mortgage. You will pay an origination fee (capped by the FHA at 2 percent of the home's value or $6,000, whichever is less), an appraisal fee, a title search and insurance fee, and other closing costs. You will also pay an insurance premium — an upfront mortgage insurance premium (typically 2 percent of the loan amount) and an annual premium (typically 0.5 percent of the loan balance each year).

Interest accrues on the loan from the moment you receive funds. If you take a lump sum, interest begins immediately. If you take monthly payments or use a line of credit, interest accrues only on the amount you have actually borrowed. Over time, as interest compounds, your loan balance grows, and the equity in your home shrinks.

Some lenders allow you to roll closing costs into the loan, meaning you do not pay them upfront but they are added to what you owe. This reduces the cash you receive but means you do not need to have the money available at closing.

What happens after you close

Once the loan closes, you own your home free and clear (or with the original mortgage paid off), and you begin receiving funds according to the payment plan you chose. You remain responsible for property taxes, homeowners insurance, HOA fees if applicable, and home maintenance. If you fail to pay property taxes or insurance, or if the home falls into serious disrepair, the lender can declare the loan due and payable.

You can pay down the loan balance at any time without penalty. Some borrowers use other income or assets to make payments, which slows the growth of the loan balance and preserves more equity for their heirs.

If you want to move or sell the home, you can do so at any time. The loan balance (principal plus accrued interest) must be repaid from the sale proceeds. If the home sells for more than you owe, you or your heirs keep the difference. If the home sells for less than the loan balance, the FHA insurance covers the shortfall, and neither you nor your heirs owe the difference.

Frequently Asked Questions

Can I get a HECM if I still have a mortgage?

Yes, but the HECM proceeds must pay off the existing mortgage first. If your mortgage balance is $100,000 and you are approved for a $200,000 HECM, the lender will use $100,000 to pay off the old mortgage, and you will receive $100,000. You cannot receive any funds until the existing debt is cleared.

What if my home value drops after I close?

The loan balance does not change. You still owe what you borrowed plus accrued interest. However, if you eventually sell the home for less than the loan balance, the FHA insurance covers the difference, and you or your heirs do not owe it. This is one of the protections built into HECM loans.

Can my heirs inherit the home without paying off the loan?

Your heirs can keep the home if they refinance the HECM into a standard mortgage or another loan in their own names. If they want to keep it without refinancing, they must pay off the loan balance from other assets. If they sell the home, the sale proceeds pay off the loan first, and they keep any remainder.

What if I need to move to a nursing home?

If you move to a nursing home or assisted living facility for more than 12 consecutive months, the loan becomes due. However, if a spouse or other family member continues to live in the home as their primary residence, the loan may remain active. You should discuss this scenario with your lender before closing.

Can I change my payment plan after I close?

Yes. If you initially took a lump sum but later want to convert part of your remaining credit line to monthly payments, you can request this change. The lender may charge a fee for the modification, so ask about costs before you request a change.