What is a HECM
HECM is the commonly used acronym for a Home Equity Conversion Mortgage, which is a reverse mortgage created by and regulated by the U.S. Government Department of Housing and Urban Development.
A HECM is not a government loan. It is a loan issued by a private bank, but insured by the Federal Housing Administration, which is part of HUD. Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund would pay off the remaining balance.
Currently, HECMs make up 99% of the reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling.
Proprietary Reverse Mortgage
Right now, very few proprietary reverse mortgages exist. However, it’s important to mention them, because market conditions may change in the foreseeable future when property values stabilize.
Proprietary reverse mortgages are non-FHA insured reverse mortgages offered by private sector banks and mortgage companies. They are not subject to all the same regulations as HECMs. There are no limits on the fees or on the amount of money you can receive. In some states, no counseling is required, though it is always recommended.
Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages, because they are taken on higher-valued homes, generally $750,000 or more.