What is a home equity conversion mortgage (HECM)?

Homeowners on fixed incomes often have substantial home equity but limited cash flow. A home equity conversion mortgage (HECM) is an FHA-insured reverse mortgage for homeowners 62 or older that lets you turn equity into cash as a lump sum, monthly payments, a line of credit, or a mix of these. Rocket Mortgage doesn't offer HECM loans, but this guide explains how they work, who’s eligible, pros and cons, alternatives, and common questions so you can decide what fits your goals.

Key takeaways:

• An HECM reverse mortgage is an FHA-backed loan for homeowners 62 and older.
• An HECM allows homeowners to borrow their home equity as a lump sum, a series of payments, a line of credit, or any combination thereof.
• An HECM comes due when the last borrower no longer lives in the home. The loan is usually repaid by selling the home, but you can also refinance it into a traditional mortgage or pay off the loan balance.

How does an HECM work?

A traditional mortgage requires you to make a monthly payment to your lender, which reduces your loan balance and builds equity over time.

An HECM is a reverse mortgage backed by the Federal Housing Administration that works in the opposite way. Instead of you making payments, the lender makes payments to you. Because you aren't making monthly mortgage payments, your loan balance grows over time as interest and fees are added, which reduces your home equity.

With an HECM, you don't have to worry about making a loan payment until the mortgage is due. You repay an HECM when the last surviving borrower dies, sells the home, or moves out of the house for more than 12 consecutive months.

While you get to skip the monthly principal and interest payments, you are still the owner of the home. To avoid defaulting, you properly maintain the property and stay current on your property taxes, homeowners insurance, and HOA fees.

You also can expect to pay standard costs to set up an HECM. These typical expenses include an up-front mortgage insurance premium (MIP), an ongoing annual MIP, lender origination fees, appraisal costs, and closing costs. These can usually be rolled into the loan balance, so you don't have to pay them out of pocket, but doing so will reduce the amount of cash you can borrow.

An HECM is a nonrecourse loan. This means that if the home is sold to repay the debt but there’s a gap between its value and the loan balance, your heirs cannot be held liable for the difference. FHA insurance covers the difference.

How much can I borrow with an HECM?

The total amount of cash you can access through an HECM is known as your principal limit. Lenders calculate your specific borrowing limit using a formula based on several factors:

• Youngest borrower’s age. In most cases, the older the youngest borrower (or eligible nonborrowing spouse) is, the higher your principal limit will be.
• Expected interest rate. A lower expected interest rate generally allows you to borrow more money, while higher rates will reduce your limit.
• Property value. The appraised value of your home affects how much equity you have to borrow.
• Other financial obligations. If you have an existing mortgage or other liens on the property, the HECM funds must first be used to pay off those debts, which reduces the amount of cash you get to take home.
• FHA’s national lending limit. The FHA caps the maximum claim amount that lenders can use to calculate your limit, regardless of how much your home is worth. For 2026, the FHA’s national lending limit is set at $1,249,125.

Homeowners can receive cash from an HECM in a lump-sum payment, a series of regular payments, a line of credit, or a combination of these. You're responsible for the loan's fees and closing costs.

How are the funds paid out?

When it comes to how you can receive the money from an HECM, you’ll have five main choices:

• Lump sum. You receive a single, one-time cash payout at closing with a fixed interest rate. This can cost more than a line of credit or a monthly payout due to interest and fees.
• Line of credit. You can draw funds as needed up to your limit, with an adjustable interest rate. You only accrue interest on the amount you borrow, and the unused portion of your credit line grows over time, giving you access to more funds later.
• Monthly payments. You can either receive equal monthly cash advances for a specific, predetermined number of months (known as term payments) or for as long as at least one borrower continues to live in the home as their primary residence (called tenure payments). This can cost less than a lump-sum payment because you pay interest only on what you've drawn so far.
• Modified term. This option combines a line of credit with fixed monthly payments for a set number of months and is available for adjustable-rate HECMs.
• Modified tenure. This option combines a line of credit with fixed monthly payments for as long as you live in the home, also with an adjustable rate.

To help protect your home equity, the FHA enforces a 60% utilization rule. This means that during the first 12 months after your loan closes, you can withdraw up to 60% of your total approved initial principal limit. An exception is made if you need more funds to pay off mandatory obligations, like an existing mortgage.

What are the options when the loan is due?

When the loan is due, you have several options:

• Sell the home. Anything left after the HECM is paid off is yours or your heirs to keep.
• Refinance into a forward mortgage. The loan can be paid off by refinancing it into a traditional mortgage for the full loan amount or 95% of the home’s value, whichever is less.
• Pay off the loan without refinancing. If you can afford it, you can pay off the loan without taking on a new mortgage, perhaps out of an estate.
• Give the property to the lender. The mortgage servicer will then sell the home to recoup the loan proceeds.

What are the eligibility requirements for an HECM?

Specific eligibility requirements for an HECM include:

• You must be 62 or older.
• The home must be your primary residence.
• You must have enough equity in the home. If you have an existing mortgage, this must be paid off using reverse mortgage funds before you receive any cash.
• You can get an HECM on a 1- to 4-unit detached or semi-detached home, a manufactured home, a townhouse, a rowhouse, or an FHA-approved condo.
• You cannot be delinquent on any federal debt, such as income taxes or federal student loans.
• You must complete a session with an FHA-approved HECM counselor before applying.
• They must undergo a financial assessment to prove they have sufficient financial resources to pay their property taxes, homeowners insurance premiums, and maintenance costs.

How do you get an HECM?

Applying for an HECM involves a few extra protective steps compared to securing a traditional mortgage:

1. Complete mandatory HECM counseling. Before a lender can process your application, you must meet with an independent counselor approved by the U.S. Department of Housing and Urban Development (HUD) to thoroughly discuss the loan's costs, financial implications, and alternatives.
2. Find an FHA-approved lender. Not all institutions offer government-insured reverse mortgages.
3. Complete the application and undergo a financial assessment. Your lender will review your income, assets, credit history, and monthly living expenses to ensure you can afford the ongoing costs of homeownership.
4. Get an appraisal. The lender will also require a home appraisal to determine your house's current market value and ensure it meets basic health and safety standards.
5. Close on your HECM: Once the underwriter approves your file, you will be cleared for closing on the loan. After you sign the final documents and complete a mandatory 3-day waiting period, your funds will be disbursed.

What are the pros and cons of an HECM?

While HECMs can help seniors supplement their income, there also are drawbacks to consider.

Pros

Some of the benefits of an HECM include:

• You’re free to use your funds to consolidate debts, supplement your income, pay for home improvements, or anything else you wish.
• There is no monthly mortgage payment. You must pay property taxes and homeowners insurance premiums while ensuring the property is well-maintained.
• Money from an HECM is not taxed, since it’s considered a loan instead of income.
• You retain the title and ownership rights to your home.
• There’s no minimum credit score requirement.
• The FHA insures HECMs, so borrowers aren't required to repay more than the property is worth if their home's value declines.
• HECMs are nonrecourse loans, so you can give the property to the lender without credit repercussions instead of paying off the loan.
• Spousal protections allow a spouse to continue to live in the home if their partner dies.

Cons

HECMs also come with some drawbacks that you’ll need to consider:

• By depleting your home equity, you have less to leave to your heirs.
• HECMs often have higher fees than traditional mortgages. For example, the up-front mortgage insurance premiums for an HECM are higher than they are for a traditional FHA mortgage.
• You must remain in the home as your primary residence or repay the loan.
• You'll need to continue paying property taxes, homeowners insurance, and maintenance.
• If you’re away from your home in a medical facility for more than 12 months, your loan comes due. There is an exception if your nonborrowing spouse is still in the home.
• Unspent money from an HECM may affect your Medicaid and Supplemental Security Income benefits.
• If you choose the wrong payment option, you may run out of funds.
• Your heirs must resolve the loan if you die in the home.
• Risk of foreclosure if you fail to meet the terms of your HECM.

Is an HECM right for your needs?

An HECM can make sense if:

• You plan to remain in your home throughout retirement.
• You want to turn your hard-earned equity into steady cash.
• You have unexpected medical or living expenses and don’t have other viable options.
• You want a backup plan to avoid outliving your savings.
• You want to avoid inheritance issues with your home.

Conversely, an HECM may be an unwise choice if you:

• Have short-term housing plans or immediate financial needs, as the steep up-front costs won't be worth it.
• You are unsure whether you can afford the ongoing costs of property taxes, insurance, and maintenance.
• Plan to leave your home to your heirs and want to maximize the wealth that’s passed on.

Be sure to consult an independent financial expert to evaluate your situation before making a commitment to an HECM.

What are HECM alternatives?

While an HECM can be a good way to access home equity, it isn’t the only option. Here are a few alternatives:

• Proprietary reverse mortgage. This type of reverse mortgage may offer different features, such as a lower age limit, a lower interest rate, or a higher loan limit. But they may not offer the same borrower protections as an HECM.
• Cash-out refinance. A cash-out refinance replaces your current mortgage with a new, larger loan. You pay off the original mortgage, keep the difference in cash, and repay what you borrow as part of your new loan. If you have a lot of equity, you may be able to borrow a large amount of cash, but you will have a monthly payment.
• Home equity loan. A home equity loan is a second mortgage that lets you borrow against the equity in your home. You receive the funds as a lump sum and make payments on it in addition to your primary mortgage. You might choose a home equity loan if you have a low interest rate on your primary mortgage that you don't want to lose. A Rocket Mortgage Home Loan Expert can help you with a blended rate calculation to determine which option makes financial sense.
• Home equity line of credit. A home equity line of credit (HELOC) is also a second mortgage, but instead of receiving a lump sum, your equity is used to establish a line of credit that you can draw from as needed. It has a draw period in which you can borrow up to your credit limit and make payments only on the interest. A repayment period follows, where you can no longer borrow and make payments on the principal and interest until the loan is repaid. Rocket Mortgage doesn’t offer HELOCs, but we still want to help you understand all your borrowing options so you can make the best choice for you.

FAQ

Here are the answers to some frequently asked questions about home equity conversion mortgages.

When should I consider refinancing an HECM?

You can refinance an existing HECM into another HECM to save money with lower interest rates or lower mortgage insurance premiums. You also can refinance an HECM into a traditional mortgage. It can make sense to refinance if your home has significantly increased in value, allowing you to access more equity, or if interest rates have dropped. You might also refinance to add a newly eligible spouse to the loan to ensure they receive spousal protections.

How does an HECM differ from a second mortgage?

The primary difference between an HECM and a second mortgage comes down to how you pay the money back. With a second mortgage, you receive funds up front but must begin making monthly principal and interest payments immediately. With an HECM, the lender pays you, and you aren't required to make any monthly payments to the lender until the loan comes due.

What is the interest rate like on an HECM?

Interest rates on HECMs are generally higher than traditional forward mortgage rates because lenders assume greater risk with deferred repayment.

How can I get out of an HECM?

Federal law gives you a 3-day right of rescission to back out of the loan without penalty right after closing. If you want to get out of a reverse mortgage later down the road, your primary options are to sell the home, refinance into a traditional forward mortgage, or pay off the loan balance in full using other funds.

The bottom line: An HECM can offer financial stability during retirement, but it involves risks

An HECM reverse mortgage can be a helpful tool that helps seniors unlock the wealth they’ve built in their homes without the burden of a new monthly mortgage payment. It can also provide financial stability and peace of mind during your retirement years. However, the loan comes with real risks, including high upfront fees, strict ongoing property obligations, and the gradual depletion of the equity you might wish to leave to your heirs.

Consider the pros and cons of HECMs and their implications for heirs, as well as alternatives that better fit your needs. Apply online for a Home Equity Loan with Rocket Mortgage to start your journey.