Home Equity Conversion Mortgage (HECM) explained: Definition and requirements

Disclaimer: Rocket Mortgage^® does not currently offer home equity conversion mortgages. (HECM). All information provided is intended as an educational resource only.

Homeowners in their senior years often find themselves with a limited or fixed income that makes it difficult for them to continue to live in their home. On the other hand, they often have a lot of home equity from paying down or paying off their mortgage debts. One solution to this quandary is a reverse mortgage, and the most common type of reverse mortgage is a home equity conversion mortgage. Backed by the Federal Housing Administration, an HECM allows older homeowners to convert their equity into cash in several different ways.

Rocket Mortgage^® doesn’t offer reverse mortgages or HECMs, but we do want you to understand all your borrowing options so you can make the right decision for you.

Key takeaways:

• A home equity conversion mortgage is an FHA-backed reverse mortgage for homeowners 62 and older.
• An HECM allows homeowners to borrow their home equity as a lump sum, series of payments, line of credit, or any combination thereof.
• HECMs come due when the last borrower no longer lives in the home. The loan usually is repaid by selling the home, refinancing into a traditional mortgage, or allowing the lender to take ownership.

How does a HECM work?

An HECM is a reverse mortgage. It works like this: Instead of making payments to your lender and reducing the amount you owe, you receive payments and the amount you owe grows.

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 those elements. You’re responsible for fees and closing costs related to the loan. The loan limit for HECM nationwide is $1,209,750 in 2025.

You do not have to make payments on an HECM until the loan comes due, which occurs when the last borrower no longer lives in the home. This usually occurs when the borrower moves out, sells the home, or dies.

HECM borrowers must pay property taxes, homeowners insurance, homeowners association dues, and they must maintain the property.

HECMs are reverse mortgages, but not all reverse mortgages are HECMs. Some lenders offer proprietary reverse mortgages with different benefits, but HECMS offer more borrower protections.

A HECM is a non-recourse loan, meaning there’s no penalty to yourself or your heirs if you give the property back to the lender. 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 a HECM?

There are specific eligibility requirements for an HECM:

• Borrowers 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 is paid off before you receive the remaining funds.
• You can get a HECM on one- to four-unit detached or semi-detached homes, manufactured homes, townhouses or rowhouses, and FHA-approved condos.

How do you get a HECM?

A HECM is only available from lenders approved by the U.S. Department of Housing and Urban Development. There are a few unique steps to apply for this type of loan.

HECM counseling is required for all borrowers and nonborrowing spouses who are legally competent, so they fully understand the loan.

HECMs also require a financial assessment. Depending on the results, some of your funds may be withheld to cover homeowners insurance, property taxes, HOA dues, and maintenance. Your loan amount is based on the age of the youngest borrower or nonborrowing spouse, current interest rates, and your home equity.

HECM alternatives

While HECMs can be a good option for accessing home equity, they aren’t the only option. Here are a few alternatives:

• Proprietary reverse mortgages. A proprietary reverse mortgage may have different features like 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 one based on what your home is worth now. You pay off the original mortgage and keep the difference in cash. You 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. However, you will have a monthly payment. Your heirs may take over the payment rather than fully paying it off when they take over ownership of the home.
• Home equity loan: A home equity loan is a second mortgage that allows you to borrow a portion of your home equity. 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 Home Loan Expert can help you with a blended rate calculation to determine which option makes the most financial sense.
• Home equity line of credit: A HELOC also is 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. A HELOC 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 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.

Can you refinance a HECM?

You can refinance an existing HECM into another HECM. Lower interest rates or mortgage insurance premiums could save you money. You also can refinance an HECM into a traditional mortgage.

What are the pros and cons of an HECM?

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

Pros

• 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 only have to pay property taxes and homeowners insurance premiums, while making sure the property is well maintained.
• 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 pay back more than the property is worth if their home value declines.
• HECMs are nonrecourse loans, so you can give the property to the lender without credit repercussions instead of paying off the loan.

Cons

• By depleting your home equity, you have less to leave to your heirs.
• HECMs often have higher fees than traditional mortgages. For example, the upfront mortgage insurance premiums for an HECM are higher than they are for a traditional FHA mortgage.
• 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.
• If you choose the wrong payment option, it’s possible to outlive the funds.
• Your heirs must resolve the loan if you die in the home.

The bottom line: HECMs can offer financial stability during retirement

An HECM is an FHA-backed reverse mortgage that allows you to access your home equity without a monthly mortgage payment. The loan comes due once you die, move out, or sell the home. There are higher fees, but once closed, you only need to worry about taxes, insurance, and maintenance. Your heirs can refinance to pay off the loan or simply walk away.

While Rocket doesn’t offer reverse mortgages, you may be able to access your home equity with a home equity loan or cash-out refinance. If these options seem like a better fit, you can apply online.