Reverse mortgages offer seniors a way to unlock their home equity without selling their property or taking on monthly mortgage payments. There is a lot of misconceptions about reverse mortgages that we hope to clear up for you in this article.
What Are the 3 Types of Reverse Mortgages?
There are three main types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), Proprietary Reverse Mortgages, and Single-Purpose Reverse Mortgages.
However, not all reverse mortgages are created equal. Each serves distinct purposes and has unique features, making it essential for homeowners to understand their options fully.
This article will explore these three types in depth, helping you choose the right one based on your financial situation and goals.
Home Equity Conversion Mortgages (HECMs)
the HECM is insured by the Federal Housing Administration (FHA), are the most popular type of reverse mortgage in the U.S. These reverse mortgages are designed for homeowners aged 62 or older and provide flexible payout options, including lump sums, monthly payments, or lines of credit (CFPB, n.d.). This FHA reverse mortgage offers funds that can be used for any purpose, offering retirees a way to supplement their income, pay medical expenses, or cover home renovations.
Benefits of HECMs:
- Fewer Restrictions: The funds can be used for anything the borrower chooses, giving flexibility to retirees.
- Non-recourse Loans: Borrowers or their heirs will never owe more than the home’s value at the time of repayment, even if the loan balance exceeds the property value.
However, borrowers must meet certain criteria, including using the home as their primary residence and undergoing a financial assessment to ensure they can cover property taxes and insurance costs.
The idea of aging with dignity resonates deeply with many retirees, and a HECM offers a path toward financial independence, ensuring seniors can remain in their homes without the burden of monthly mortgage payments.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are privately funded loans not insured by the FHA. These reverse mortgage loans are often aimed at homeowners with high-value properties who need to borrow more than the limits set by HECMs. Because they are not subject to federal guidelines, proprietary loans offer more flexibility in terms of loan amounts but may come with higher fees or interest rates.
Advantages of Proprietary Reverse Mortgages:
- Higher Loan Limits: These loans are ideal for homeowners with high-value homes, as they allow access to more equity than HECMs.
- Fewer Restrictions: Since these mortgages are not backed by the FHA, lenders have more discretion in setting terms.
For those with substantial home equity, the logic of choosing a proprietary loan lies in the ability to borrow more funds. This provides homeowners with greater financial flexibility, especially if they need large sums for investments, medical care, or other substantial expenses.
However, borrowers must weigh the benefits against the potential risks, such as higher interest rates or fees. Unlike HECMs, proprietary reverse mortgages lack federal insurance, which means the lender has more control over repayment terms.
Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages are the least common type and are offered by some local or state government agencies and non-profit organizations (CFPB, n.d.). These loans are restricted to a specific purpose, such as home repairs, property taxes, or insurance premiums.
Features of Single-Purpose Reverse Mortgages:
- Lower Costs: These loans often come with minimal fees and lower interest rates compared to other reverse mortgages.
- Restricted Use: Borrowers must use the loan for the specified purpose agreed upon with the lender.
Government agencies and non-profits offering these loans appeal to ethos by positioning themselves as trustworthy entities dedicated to helping low- or moderate-income seniors remain in their homes.
Single-purpose reverse mortgages are ideal for those who need to cover a specific expense but don’t require a large sum of money. However, their restricted use makes them less flexible than HECMs or proprietary reverse mortgages.
Choosing the Right Reverse Mortgage
The right type of reverse mortgage depends on your financial needs, the amount of home equity you have, and how you plan to use the funds. Here are some key questions to consider when choosing between these options:
- How Much Equity Do You Need Access To?
If you need a large loan amount, a proprietary reverse mortgage may be the best option. If you need only a small amount for specific expenses, a single-purpose loan might suffice. - Do You Qualify for an HECM?
If your home value falls within FHA loan limits, a HECM offers a safe and flexible way to access your equity. - What Are Your Long-Term Goals?
Consider how each loan option aligns with your long-term financial plans, including how it will affect your heirs or future property decisions.
Think of these reverse mortgages as tools in a financial toolbox. Just as you would select the right tool for a job, it’s essential to choose the reverse mortgage that best fits your financial needs and goals.
Three Types of Reverse Mortgages to Remember
Understanding the three types of reverse mortgages—HECMs, proprietary loans, and single-purpose loans—is crucial for homeowners seeking to access their home equity in retirement. Each option offers distinct advantages and limitations, making it essential to align your choice with your financial goals and circumstances.
The key takeaway is that each reverse mortgage type serves a unique purpose: HECMs offer flexibility, proprietary loans provide access to higher amounts, and single-purpose loans deliver targeted assistance.
By carefully evaluating your needs and consulting with financial professionals, you can make an informed decision that helps you leverage your home’s value effectively and securely in your retirement years.
BD Nationwide offers this comprehensive guide to provides insights into the three types of reverse mortgages, helping homeowners navigate their options and make the best financial decisions for their needs.
References
Consumer Financial Protection Bureau (CFPB). (n.d.). What is a Reverse Mortgage? Retrieved from https://www.consumerfinance.gov
U.S. Department of Housing and Urban Development (HUD). (n.d.). Reverse Mortgages. Retrieved from https://www.hud.gov
National Council on Aging (NCOA). (n.d.). Reverse Mortgage Counseling. Retrieved from https://www.ncoa.org
Federal Trade Commission (FTC). (n.d.). What to Know About Reverse Mortgages. Retrieved from https://www.consumer.ftc.gov