This is especially important for homeowners age 62 and older
who may also qualify for a Home Equity Conversion Mortgage, or HECM.
Both options can provide access to equity without requiring traditional monthly
principal-and-interest payments, but the way their future costs are calculated
can be very different.
Table of Contents
- What
Does “No Interest” Really Mean With an HEI?
- Do
the Math: A $50,000 HEI Example
- Now
Compare the Same $50,000 With a HECM
- But
Doesn’t a HECM Charge Interest?
What Does “No Interest” Really Mean With an HEI?
An HEI is generally an agreement in which a company gives
the homeowner cash today in exchange for a future payment tied partly to the
home’s value. The Consumer Financial Protection Bureau (CFPB) refers to
these products as home equity contracts and notes that they are also marketed
as home equity investments or shared equity agreements.
Because the agreement may not charge traditional loan
interest, companies can advertise “no interest.” Yet that does not mean
accessing the money has no financial cost.
Instead, the HEI company may use:
- A
percentage of the home’s future value
- A
multiplier on the amount advanced
- A
discounted starting property value
- A
share of future appreciation
- A
contractual rate or return cap
- Processing
and third-party closing fees
The CFPB found that processing fees alone are often around
3% to 5% of the initial payment. It also reported that some HEI structures can
produce costs equivalent to very high annual financing rates during the early
years of the agreement.
Therefore, homeowners should ask a better question than,
“What is the interest rate?”
Ask:
“Exactly how many dollars could I owe in five, ten, or
twenty years?”
Do the Math: A $50,000 HEI Example
The CFPB published a hypothetical example that makes the
potential cost easier to understand.
In its example:
- Home
value: $500,000
- Cash
received: $50,000
- HEI
company’s stake: 20% of the home’s future value
- Home
appreciation: 6% annually
- Contract
includes a 20% annual return cap
The homeowner receives $50,000.
After three years, the estimated HEI settlement amount
is $86,400.
After ten years, it grows to $179,085.
Think about what that means.
The homeowner received:
$50,000
The homeowner eventually repays:
$179,085
The difference is:
$129,085
That means the homeowner pays back about 3.58 times
the original $50,000 received.
The CFPB calculates that the ten-year cost in this
particular scenario is equivalent to roughly a 14% annual rate,
even though the product is marketed without traditional interest.
“No interest” clearly does not mean “no cost.”
Now Compare the Same $50,000 With a HECM
A HECM works
differently. It is an FHA-insured reverse mortgage available to qualifying
homeowners age 62 or older. Instead of exchanging part of the home’s future
value with an investment company, the homeowner borrows against the property.
Interest and mortgage insurance charges are added to the HECM
loan balance over time. Therefore, the cost is visible as an
increasing loan balance rather than a percentage claim on future home value.
Consider a simplified illustration.
Assume a homeowner
takes $50,000 from a HECM and, purely for comparison, assume the
balance grows at a combined hypothetical rate of 7.5% annually,
reflecting an assumed interest rate plus the FHA annual mortgage insurance
charge.
This is not a current rate quote. Actual HECM rates, loan
terms, closing costs, and available proceeds vary.
With monthly compounding, approximately:
After three years:
$50,000 grows to about $62,572.
After ten years:
$50,000 grows to about $105,603.
Compare that with the CFPB’s HEI example.
After ten years:
Illustrative HECM balance: approximately $105,603
CFPB HEI settlement example: $179,085
That is a difference of approximately:
$73,482
The difference becomes especially significant when homeowners expect
their property to appreciate over many years.
But Doesn’t a HECM Charge Interest?
Yes. That is an important part of the comparison.
A HECM is
a loan, and interest and fees accumulate on the outstanding balance. FHA
mortgage insurance also applies. The CFPB explains that the annual mortgage
insurance premium equals 0.5% of the outstanding HECM balance, and other costs
may include origination and third-party closing expenses.
However, seeing an interest rate does not automatically make
one option more expensive.
A homeowner should compare total
future dollars owed, not simply compare:
“interest” versus “no interest.”
An HEI may have no stated loan interest rate while still
producing a substantially larger settlement amount because the company
participates in the property’s value or appreciation.
That is why doing the calculations matters.
Contact Reverse Mortgage Specialists (843) 491-1436
for a consultation before making any decisions based on an ad. The call won’t
cost you anything and could save you or your heirs a lot of money.
Tomorrow’s post will continue this comparison.
Sources
Consumer Financial Protection Bureau, Reverse Mortgage
Loans, updated January 12, 2026.
Consumer Financial Protection Bureau, How Much Does a
Reverse Mortgage Loan Cost?
Learn more about reverse mortgages on our Facebook
page.
South Carolina Reverse Mortgage Services
Charleston, SC 29401
843-491-1436
https://reversemortgagespecialistusa.com/
Areas Served:
Myrtle
Beach, SC, Charleston,
SC, Columbia,
SC, Greenville,
SC, Hilton
Head Island, SC
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