A Home Equity Conversion Mortgage (HECM) usually has upfront and ongoing costs. Interest and financed charges are added to the balance, so the amount owed generally rises. The homeowner must keep paying property taxes, insurance, maintenance, and other required property charges.
Upfront costs
A HECM may include:
- FHA upfront mortgage insurance premium
- Origination charge
- Appraisal and property review costs
- Title, escrow, recording, and settlement charges
- Counseling fee when charged by the counseling agency
- Other permitted third-party costs
Some costs may be financed. Financing a cost reduces cash due at closing but adds to the loan balance.
The actual Loan Estimate and Closing Disclosure control the transaction. A website list does not.
Ongoing costs
The balance can include:
- Interest on borrowed funds and financed charges
- Annual FHA mortgage insurance premium
- Servicing-related amounts permitted by the loan documents
- Additional advances made under the payment plan
Ask to see how the balance could change over time under more than one draw pattern and home-value assumption.
The homeowner's continuing responsibilities
The homeowner must:
- Pay property taxes on time
- Keep required homeowners and flood insurance in force
- Pay association dues and other required property charges
- Maintain the home and complete required repairs
- Occupy the home as a principal residence under the loan terms
- Respond to occupancy certifications and servicer notices
Failure to meet these obligations can cause default and may put the home at risk.
Financial assessment and set-asides
The lender reviews the borrower's ability and willingness to meet property-charge obligations. Depending on the review and current program rules, part of the proceeds may need to be set aside to pay certain charges.
A set-aside is not free money and does not remove every homeowner responsibility. Ask what it covers, how long it is expected to last, and what happens if actual expenses change.
Repairs and property condition
The property must meet applicable standards. Some repairs may be required before closing. In permitted cases, certain repairs may be completed after closing under a repair arrangement.
Do not assume every condition can be handled later. Confirm the required work, cost, deadline, inspection, and available proceeds before deciding.
Safeguards built into a HECM
Independent counseling
Borrowers must complete counseling with a HUD-approved agency. The counselor explains the loan and alternatives independently from the lender.
FHA insurance
FHA insurance supports the HECM program, including its non-recourse feature and lender obligations under program rules. It does not make the loan free or remove homeowner duties.
Non-recourse protection
In general, a borrower or estate does not have to pay more than the value of the home when the loan is resolved according to HECM rules.
Disclosures and time to review
Borrowers receive federal and loan-specific disclosures. Most refinance transactions include a three-business-day right to cancel after closing. Purchase transactions generally do not have that federal rescission right.
Risks that deserve a direct conversation
- The loan balance usually grows.
- Remaining home equity may decline.
- Upfront costs can be high for a short holding period.
- A spouse or household member may have different rights depending on borrower and occupancy status.
- A move to a care setting can affect principal-residence status.
- Unpaid property charges can lead to default.
- Holding proceeds can affect needs-based benefits.
- Heirs face deadlines and must communicate with the servicer.
- Fraud, contractor pressure, and investment cross-selling target older homeowners.
Common questions
Is the interest tax deductible each year?
Reverse mortgage interest is generally not deductible until it is actually paid, and other tax limits may apply. Ask a qualified tax professional about the specific facts.
Are the proceeds taxable income?
Reverse mortgage advances are generally loan proceeds, not income. That does not answer every tax or public-benefit question. How the funds are used or retained can matter. Ask the appropriate tax or benefits professional.
Can the lender take other assets if the home is worth less than the balance?
HECMs are non-recourse, subject to the program rules. The borrower or estate generally is not responsible for a deficiency beyond the home's value when the loan is resolved properly.
What if I cannot pay my property taxes or insurance later?
Contact the servicer immediately. Waiting can reduce available options. A HUD-approved housing counselor may also help the homeowner understand loss-mitigation or assistance resources.
A note from Nick
The benefit is easy to say in one sentence. The responsibilities take longer.
I want to spend time on both. If the future property charges do not fit the budget, no amount of available proceeds makes the plan safe.
Call to action
Review the obligations before the opportunity
Bring your current mortgage statement, property tax bill, insurance declaration page, association dues, and a realistic maintenance estimate. We will start there.
General information, not advice. This page explains how a program generally works. It is not an offer or commitment to lend, and it is not a recommendation for your situation. Eligibility, costs, and fit require an individual review. Talk to a licensed professional before deciding. Call Nick at 916-765-4009.