Under the Home Equity Conversion Mortgage (HECM) program, also known as Reverse Mortgage program, homeowners aged 62 years and older may convert the equity in their homes to cash using a variety of payment options to address their specific financial needs. The program was designed by HUD and features FHA insurance. With a HECM, the loan balance likely will increase over time. All payments made to the borrower are added to the loan balance as they occur. Interest, mortgage insurance premiums and servicing fees accrue and are added to the loan balance, which is increased by the following:

• Payments
• Mortgage insurance premiums
• Interest
• Servicing fees (Currently N/A)

A borrower may choose to make payments but the loan is generally not due and payable as long as the borrower occupies the subject property as their principal residence and does not violate any covenants of the mortgage. The HECM borrower may make a payment monthly or intermittently if they choose and if they are in a Line of Credit, they may use and reuse funds as desired.

The key components of the HECM loan include the following:

Principal Limit

The HECM program manages the risk of loan loss by controlling the amount of cash borrowers may receive at any point in time. This is accomplished by calculating the principal limit for each loan. The principal limit is set at origination and is determined by multiplying the maximum claim amount by a factor prescribed by HUD based upon the Expected Average Mortgage Interest Rate and the age of the youngest borrower or their nonborrowing spouse.

Payment Plans

Six payment plans are available to HECM borrowers:

• Single payment at closing (lump sum).
• Line of credit payment plan provides for payment to be made to the borrower whenever the borrower requests a disbursement from the lender, until the principal limit has been reached.
• Term payment plan provides for equal monthly payments to the borrower over a fixed term agreed to by the lender and the borrower.
• Modified term payment plan combines the characteristics of term payment plan with a line of credit. This allows the borrower to set aside part of his/her principal limit at origination to establish a line of credit that can be drawn on at any time and then receive the balance of the principal limit in the form of equal monthly payment s over a fixed term.
• Tenure payment plan provides for equal monthly payments to the borrower for the life of the borrower or until he no longer occupies the home.
• Modified tenure payment plan combines the characteristic of a tenure payment plan with a line of credit payment plan. This allows the borrower to set aside part of his/her principal limit at origination to establish a line of credit that can be drawn on at any time and to receive the balance of the principal limit in the form of equal monthly payments.

The loan is closed when the borrower with a credit line pays the loan balance to zero (0) and title is re-conveyed. Open-end credit loans allow for the repayment of some or the entire principal, which the borrower may reborrow at some future date. Closed-end credit loans do not allow the borrower to re-borrower principal that is paid on the loan. The borrower may also elect to have scheduled payments stopped for a period of time, and then restarted.