The banking and home mortgage industry can be fraught with confusing terms. Many people come across words and acronyms that may leave them wondering exactly what they are applying for when they fill out paperwork like a loan application. However, many of these confusing terms are used in place of more commonly known labels like reverse mortgages. When senior citizens encounter the acronym HECM, they can rest assured that this term is more popularly known as a reverse mortgage. Understanding the link between the two definitions can also help seniors decide to obtain one of these loans for themselves.
The acronym HECM stands for Home Equity Conversion Mortgage. Just as its name states, it is a mortgage that converts the equity of a person’s home into cash that is then loaned by the lender to the borrower. Also as its name implies, people must have equity in their home in order to qualify for this type of financing. A home that already has an upside down mortgage or a depreciated value may not qualify for an HECM at all.
HECM and Reverse Mortgage
Understanding that a home’s equity is converted into the cash principle of a home mortgage can also help people learn why this financial move is also called a reverse mortgage. In essence, the payment stream in an HECM is reversed. The lender pays the borrower either a lump sum of money or regular payments each month while the borrower in turn pays nothing at all on the loan until after he or she passes away or moves out of the house. In traditional mortgages, borrowers make monthly payments to the lender until the loan is satisfied or the house is sold. With a reverse mortgage, however, borrowers are under no obligation to make such payments, all the while still being able to live in their homes and use the money from the mortgage as they see fit.
Easy HECM Qualifications
Most homeowners know full well the nerve wracking experience that comes with applying for a mortgage. They often must meet very strict criteria and provide copious amounts of documentation before they can be approved for a home loan. However, an HECM often entails much easier and less stressful qualifications. These loans are based more on the equity in a home rather than a person’s credit worthiness or their employment information. As long as seniors meet the age requirement, own their home as a primary residence, take a credit counseling class, and meet a few other basic criteria, they could be approved in a short time for their reverse mortgage. They avoid the stress, worry, and frustration that many younger homeowners encounter when trying to secure financing.
The banking and home mortgage industry is full of confusing terminology. Senior citizens who want to apply for a reverse mortgage, only to see the acronym HECM on their paperwork might be alarmed that they are not applying for the right loan. However, this term often is used in place of reverse mortgage and includes the same qualifications and benefits.