Home Equity Conversion is a term used among federal government housing specialists and among some reverse mortgage lenders to refer to the practice of taking out a loan on a home in which the borrower holds substantial equity. The equity – that portion of the home that the borrower has paid off – acts as collateral for the new loan. The term can apply to regular home equity loans which are also known as second mortgages. More often however, it is used in reference to reverse mortgages. Because reverse mortgages require that the original mortgage be paid off, the reverse mortgage becomes the primary mortgage.
The Department of Housing and Urban Development (HUD) calls reverse mortgages HECMs, which stands for Home Equity Conversion Mortgages. The difference between a standard home equity loan and a reverse mortgage is that on a reverse mortgage, no payment is required unless the borrower dies or decides to sell the home and move.
There are two principal differences between a reverse mortgage and a home equity loan. The first is this fact that that a reverse mortgage is designed such that no monthly payments are required. The home provides the collateral for the mortgage, which is paid off in total when the homeowner dies or sells. The second is that since monthly payments are required, there is no income requirement for the potential borrower.
A regular mortgage provides that the borrower acquires equity in the home by making monthly payments. The reverse of that process is the lender providing you, the homeowner, with cash in return for equity in your home. That’s the origin of the term “reverse mortgage” for the process of home equity conversion.
Under the terms of a reverse mortgage (or HECM) you are required to pay off any remaining balance owed on your original mortgage. In addition most people finance the closing costs on a reverse mortgage from the cash provided by the new loan. The amount that remains can be provided in a lump sum or as a monthly stipend – much like you used to provide a monthly stipend to the lender on your original loan.
One of the most compelling features of a home equity conversion loan is that the borrower can remain in the home for as long as he or she lives. No holder of a reverse mortgage can be forced from their home. At least, that is true for borrowers with a HUD approved reverse mortgage. It pays to go through the HUD reverse mortgage counseling process in order to insure that you receive a safe loan.
Click here to contact a Reverse mortgage lender regarding an HECM.