Delving into the Main Types of Reverse Mortgage Loans
Reverse mortgages come in three primary forms: the Home Equity Conversion Mortgage (HECM), the proprietary reverse mortgage, and the single-purpose reverse mortgage.
Home Equity Conversion Mortgage (HECM)
The Home Equity Conversion Mortgage (HECM) represents the most prevalent source of reverse mortgage financing. It is accessible to eligible borrowers who are at least 62 years of age and own homes that are either fully paid off or have minimal outstanding mortgage balances. These loans benefit from insurance provided by the U.S. government, administered through the Federal Housing Administration (FHA). Should the accumulated debt from the reverse mortgage surpass the home’s value, the FHA typically absorbs a substantial portion or all of that loss. While borrowers pay a mortgage insurance premium, this cost can be integrated into the overall loan amount. The FHA also imposes limits on the origination and servicing fees that reverse mortgage lenders can charge. According to Peter H. Bell, CEO of the National Reverse Mortgage Lenders Association, HECMs are generally suitable for most properties valued under $1 million.
Proprietary Reverse Mortgage
Proprietary reverse mortgages share similarities with HECMs but lack the government guarantee. They generally come with fewer restrictions, and the lending institution might relax eligibility criteria, potentially even waiving the financial review conducted by a Department of Housing and Urban Development counselor. This type of loan can surpass the borrowing limits imposed on HECMs, making it an attractive option for owners of high-value properties. However, it’s worth noting that associated fees might be higher than those found with an HECM. The most appropriate reverse mortgage choice ultimately hinges on the specific programs for which you qualify. Bell highlights that “Proprietary loans are not available in every area,” adding that “some properties do not qualify for an HECM reverse mortgage, like a condominium that doesn’t meet the FHA standards.”
HECM for Purchase
An HECM for Purchase offers a mechanism to acquire a new home that will serve as your primary residence. With this strategy, you enter into a purchase agreement for your desired home, provide a down payment, and then finance the remaining purchase amount through the reverse mortgage, rather than paying outright cash or securing a traditional first-lien mortgage. It’s crucial that the new home is not a vacation property or an investment asset. This approach streamlines the acquisition into a single transaction, freeing you from the burden of monthly mortgage payments on your new residence. Many seniors leverage an HECM for Purchase to downsize their living space or to relocate closer to family members.
Single-Purpose Reverse Mortgage
With a single-purpose reverse mortgage, the lender imposes specific limitations on how the borrowed funds can be utilized. For instance, the money might be restricted to particular uses such as covering property taxes or funding home repairs. These reverse mortgages are typically the most economical option, but their availability is constrained. They are offered by certain state and local governments and non-profit organizations, usually catering to low- and moderate-income borrowers who might not meet the qualifications for other reverse mortgage types.
Potential Disadvantages of Reverse Mortgages
Reverse mortgage lenders levy various fees. While the majority of these fees are deferred until you no longer reside in the home, the overall amount you receive could be less than if you had simply sold the property outright. The reverse mortgage company will also charge interest on the borrowed sum. Although this interest doesn’t require payment while you’re still living in the home, it continuously reduces your home equity.
Your reverse mortgage loan becomes due for repayment if you move out, sell the home, or pass away. If you decide to downsize, you would be required to pay off your reverse mortgage—typically by selling the property. And while you are exempt from monthly loan payments on a reverse mortgage, you remain responsible for other housing costs, such as property taxes. Failure to cover these expenses could lead to the reverse mortgage lender initiating foreclosure proceedings on your home. However, Bell emphasizes that this concern isn’t exclusive to reverse mortgages: “If you don’t pay your property taxes, you could eventually lose your home in any situation.”
A reverse mortgage could potentially diminish the inheritance left for your heirs, as it reduces the equity within your home. If your heirs choose to sell your home after your death, the proceeds from the sale will first be used to satisfy the loan, with any remaining funds going to them. Should they wish to retain the property, they would first need to pay off the outstanding loan balance. Andrina Valdes, executive sales leader and COO at Cornerstone Home Lending, notes, “We often have clients that decide not to proceed with a reverse loan because they’re worried they won’t leave as much of an inheritance.” She advises clients to “think about discussing with their potential heirs before moving forward.”
Fees Associated with Reverse Mortgages
Fees vary based on the specific type of reverse mortgage you secure, but with an HECM, you can anticipate the following charges:
Upfront Fees:
- Appraisal costs.
- Closing costs.
- Origination fees.
- Initial mortgage insurance premium.
- Points (an optional charge to secure a lower interest rate).
Ongoing Fees:
- Loan interest: Reverse mortgages can have either fixed or adjustable interest rates. Valdes advises thorough research into all available loan possibilities. “Adjustable-rate mortgages often scare people, but the ARM features in an HECM can create more options and let the borrower use their equity more wisely,” she explains, adding that “A well-informed borrower makes better decisions.”
- Mortgage insurance: You will continue to pay mortgage insurance to the FHA as compensation for guaranteeing your loan. This involves an annual MIP of 0.5% of the outstanding mortgage balance. This amount is added to your accumulating loan balance, meaning you are not required to pay for the mortgage insurance directly while residing in your home.
- Servicing fee: The lender is permitted to charge a monthly servicing fee for the administration of your loan. The maximum monthly servicing fee is $30 for fixed-rate or annually resetting adjustable-rate loans, and $35 for monthly resetting adjustable-rate loans.
How to Evaluate Reverse Mortgage Lenders
To select the most suitable reverse mortgage for your needs from various competing companies, consider these factors:
- Loan types offered: Investigate which loan options different reverse mortgage companies provide. For example, if your preference is an adjustable-rate line of credit, a lender that only offers fixed-rate lump sum or tenure payments would not be a good match.
- Costs: Compare various reverse mortgage offers by obtaining rate quotes and identifying the company with the most favorable interest rates and fees. Be aware that there’s often a trade-off between upfront costs and ongoing rates. Focus on the overall financial impact when comparing lenders. “Often, the difference between lenders is where they put the costs,” Bell clarifies. “Lenders that charge a lower interest rate are usually charging more upfront, while low-cost lenders may charge a higher interest rate. The right choice depends on when you want to pay: upfront or over the course of the loan.”
- Customer service ratings and reviews: Assess the customer satisfaction track record of a reverse mortgage lender. Review borrower testimonials and consult the Better Business Bureau to check for any complaints or feedback from other clients. Bell strongly advises choosing lenders who are members of the National Reverse Mortgage Lenders Association. “Our lenders have to follow a code of ethics for how they treat their customers. If a customer ever has an issue with a lender on our list, they can reach out to us and we can help resolve the dispute,” he states.