Overview
HECMs (Home Equity Conversion Mortgages) and private reverse mortgages both let homeowners age 62 and older tap home equity without monthly mortgage payments, but they are governed very differently. HECMs are the federal program backed by the Federal Housing Administration (FHA) and include mandatory consumer protections. Private reverse mortgages are proprietary loan products from banks or specialty lenders that are not FHA‑insured and can vary widely in cost, eligibility, and legal protections.
In my 15+ years advising older homeowners, I’ve seen the consequences of choosing the wrong product: higher long‑term costs, unexpected repayment timing, or fewer options for heirs. Below I explain the practical differences, typical scenarios, and a decision checklist to help seniors and their families evaluate options responsibly.
Why the distinction matters
- Consumer protections: HECMs require HUD‑approved counseling, an FHA mortgage insurance premium (MIP) that protects borrowers when loan balances exceed home value, and standardized rules for repayment and non‑borrowing spouses (HUD: HECM program: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome). Private reverse mortgages do not carry these federal guarantees.
- Cost and flexibility: Private products can sometimes close faster or offer niche features, but they may charge higher interest or fees and can have stricter repayment triggers.
- Estate and family impact: HECM rules for heirs, loan repayment, and sale are standardized; private lenders may set different requirements that affect estate planning.
How HECM works (practical summary)
- Eligibility: Homeowners must be age 62+, live in the home as their primary residence, and own the home outright or have a low mortgage balance (HUD guidance).
- Payout options: Lump sum, tenure (monthly for life), term (monthly for a set time), line of credit, or a combination.
- Repayment: Loan becomes due when the last borrower dies, sells, or permanently moves out. Borrowers must stay current on property taxes, homeowners insurance, and maintenance.
- Protections: Mandatory HUD‑approved counseling before closing, and the FHA mortgage insurance limits borrower liability to the home value (HUD: HECM program). For detailed consumer guidance see the Consumer Financial Protection Bureau (CFPB): https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-203/.
How private reverse mortgages differ
- No FHA insurance: There is no FHA‑backed mortgage insurance, so borrowers lack the same federal safety net if the loan balance grows beyond home value.
- Variable underwriting: Eligibility, age minimums, income checks, and credit requirements can differ by lender. Some lenders accept younger borrowers (e.g., 60+), but that may change long‑term economics.
- Unique repayment triggers: Private contracts may include different events that trigger repayment, such as a requirement to make some monthly payments or stricter residency rules.
- Costs and features: Some private plans advertise lower upfront costs or novel payout structures. In practice, total lifetime interest and fees can be higher if the interest rate, compounding method, or fee schedule is less favorable.
Quick comparison table
| Feature | HECM (FHA‑insured) | Private Reverse Mortgage |
|---|---|---|
| Federal insurance | Yes (FHA) | No |
| HUD counseling required | Yes | Usually not (but sometimes recommended) |
| Typical eligibility age | 62+ | Often varies (sometimes 60+) |
| Payout choices | Lump sum, tenure, term, line of credit, combo | Varies by lender |
| Protections for heirs | Standardized | Contract dependent |
| Common costs | Upfront MIP, origination, servicing | Varies; can include higher interest or fees |
Real‑world examples from practice
- Case A: A 70‑year‑old couple wanted flexibility in retirement spending. They chose a HECM with a line of credit. Over six years they used small draws; the HECM’s credit‑line growth feature (unused line can grow) provided a predictable safety buffer. The FHA insurance reduced the risk that a sale would be needed if home values declined (HUD guidance).
- Case B: A 68‑year‑old pursued a private reverse mortgage because it closed faster and seemed cheaper up front. After three years the loan balance had grown due to a higher adjustable rate and additional fees. When the borrower moved to assisted living, the estate faced a narrower range of options than if they’d chosen a HECM.
Eligibility and who should consider each option
- Consider a HECM if you: want FHA backing and the consumer protections it brings; need flexible payout options (especially a line of credit); or want standardized rules for counseling and non‑borrowing spouses. HUD and CFPB guidance recommend counseling before signing (HUD: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome; CFPB: https://www.consumerfinance.gov/).
- Consider a private reverse mortgage if you: are seeking a product with very specific terms not available in HECM, need a faster close and have carefully compared lifetime costs, or if you’re ineligible for HECM for some reason. Proceed cautiously and get independent advice.
Common mistakes to avoid
- Skipping HUD counseling or independent financial advice. Counseling is required for HECMs and valuable for private options as well.
- Focusing only on upfront fees. Compare lifetime costs: projected interest accrual, fee caps, and how the line‑of‑credit grows or shrinks.
- Ignoring residency and tax obligations. Failure to pay property taxes or insurance can trigger default and foreclosure on any reverse mortgage type.
- Not considering heirs. Discuss estate plans with family: HECMs and private loans can produce different outcomes for heirs.
Practical decision checklist
- Get HUD‑approved counseling (required for HECM) — it clarifies the HECM’s protections and alternatives (see our guide on reverse mortgage counseling: https://finhelp.io/glossary/reverse-mortgage-counseling-requirement/).
- Compare total cost estimates: initial fees, interest rate (fixed vs adjustable), mortgage insurance (for HECMs), and servicing fees.
- Evaluate payout format: lump sum, tenure, term, or line of credit — match this to cash needs (healthcare, debt paydown, or income supplement).
- Ask how the loan treats a non‑borrowing spouse and check the contract for repayment triggers.
- Run scenarios for how long you expect to stay in the home and what happens to the balance at death or sale.
For a broader primer on reverse mortgages, see our Reverse Mortgage Guide.
Tax and means‑tested benefit considerations
Reverse mortgage proceeds are generally loan advances and not taxable income. However, they can affect eligibility for means‑tested benefits like Medicaid if proceeds are saved and not spent over a look‑back period. Consult a tax advisor and Medicaid planner before proceeding; HUD and CFPB materials explain non‑taxable treatment but urge benefit planning (CFPB: https://www.consumerfinance.gov/).
Questions heirs often ask
- Can heirs keep the home? Usually yes if they repay the loan balance (or 95% of the home’s appraised value for a HECM non‑recourse loan). For private loans, terms vary, so request the estate disposition rules in writing.
- What if the borrower moves into assisted living? Moving out permanently is typically a repayment trigger; plan for alternatives such as selling the home to repay the loan or the heirs repaying the balance.
Final recommendations (practical takeaways)
- Always start with HUD‑approved counseling for any reverse mortgage consideration. It’s not just bureaucracy: counseling uncovers unwanted surprises and helps compare HECM vs private offers.
- Favor HECM when you prioritize federal protections, a line‑of‑credit that can grow, and predictable heir rules.
- Use private reverse mortgages only after careful lifetime cost modeling and independent legal review.
Internal resources and further reading
- Reverse Mortgage Guide: https://finhelp.io/glossary/reverse-mortgage-guide/
- Reverse Mortgage Counseling Requirement: https://finhelp.io/glossary/reverse-mortgage-counseling-requirement/
- Single‑Purpose Reverse Mortgage (brief contrast): https://finhelp.io/glossary/single-purpose-reverse-mortgage/
Professional disclaimer: This article is educational and does not replace personalized financial, tax, or legal advice. Individual circumstances vary; consult a HUD‑approved counselor, a qualified tax professional, and an attorney before signing any reverse mortgage documents.
Authoritative sources cited during 2025 updates:
- HUD, HECM program overview: https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome
- CFPB, What is a reverse mortgage?: https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-203/
- AARP, Reverse mortgages explained: https://www.aarp.org/money/personal-finance/reverse-mortgages/
In my practice, careful use of counseling and side‑by‑side projections has helped clients preserve more equity and avoid surprises. If you’re evaluating options, document all quotes, ask for long‑term amortization examples, and include family in the conversation where appropriate.
