Credit Loan > Home Loans > The Home Equity Conversion Mortgage - An FHA Insured Reverse Home Loan

Home Equity Conversion Mortgage

The only reverse mortgage product currently insured by the Federal Housing Administration (FHA) is the Home Equity Conversion Mortgage (HECM). Although up front fees for HECMs are generally higher than for other reverse home loans, they also commonly provide bigger payouts, lower interest rates, more flexibility and offer more protection to the borrower.

The amount that can be borrowed with an HECM home loan depends on the value of the home, the age of the borrower, and current interest rates. More money can be loaned from an HECM if the borrower is older and interest rates are lower. And, more can be borrowed if the value of the home is higher... up to a limit. As of November, 2008, the limit is $417,000, but as of this writing there is legislation pending to raise the limit to $650,000 through the end of 2009. If the available equity in the home exceeds this limit the loan can still be made, but only up to the current limit.

There are several options for receiving payment from the loan. The simplest method would be a single lump sum payment; however, any bank account that this money would be kept in will not likely draw as much interest as would be charged on the loan itself, so lump sums are typically used for retiring debt and for expenses such as home repairs. Another option would be to have payments available on demand as an open line of credit. Payments can also be made in fixed amounts at intervals, or the loan can be customized to employ any combination of these payout methods.

There are a lot of protections offered with the HECM that are not necessarily available with other reverse mortgages. To begin with, the FHA requires that borrowers consult with an approved HECM counselor to make sure that the terms of such a loan would be appropriate for their particular financial circumstances and that they understand how it works. The amount owed on an HECM can never exceed the value of the home. Even if the amount paid out plus the interest is greater than can be recovered by the sale of the home, the borrowers, the estate, or the heirs will not be responsible for paying more than the home(s) value.