Exploring Reverse Mortgage Varieties: A Comparative Guide
For homeowners aged 62 and above, a reverse mortgage provides a mechanism to access the accumulated equity within their homes as collateral. This type of loan typically does not require repayment until specific events occur, such as the homeowner’s passing, their permanent relocation, or the sale of the property. There are three principal categories of reverse mortgage loans available: single-purpose, federally insured, and proprietary. This article will outline their key differences and applications.
Core Concepts
- Reverse mortgages offer homeowners aged 62 or older a source of income derived from their home’s equity.
- The loan’s repayment is generally deferred until the homeowner’s death, relocation, or sale of the property.
- The three main types of reverse mortgage loans are single-purpose, federally insured (HECMs), and proprietary.
- Single-purpose reverse mortgages, offered by certain governmental and non-profit entities, are the most economical but least prevalent form.
- Home Equity Conversion Mortgages (HECMs) are federally insured loans backed by the U.S. Department of Housing and Urban Development (HUD) and represent the most common type.
- Proprietary reverse mortgages are provided by private lenders for homeowners seeking to borrow amounts exceeding the HECM limits.
Single-Purpose Reverse Mortgages
These particular reverse mortgages are extended by certain state and local government bodies and non-profit organizations. They stand out as the least expensive reverse mortgage alternative, partly due to the backing they receive from these governmental or non-profit entities. As a result, homeowners can anticipate lower interest rates and fees for a single-purpose reverse mortgage compared to a Home Equity Conversion Mortgage (HECM) or a proprietary reverse mortgage.
This type of loan is the least frequently encountered among the three categories and is not universally accessible across all states. Its operation differs somewhat from the other types, which can be used for any financial need. Lenders of single-purpose reverse mortgages impose restrictions on how the funds can be utilized, typically limiting them to specific needs such as essential home repairs or the payment of property taxes.
Like other reverse mortgage forms, single-purpose reverse mortgages are not due for repayment until the home’s ownership changes, the borrower establishes a different primary residence, or the borrower passes away. These loans can also become callable if borrowers cease to maintain homeowners insurance on the property or if the municipality deems the property uninhabitable.
Home Equity Conversion Mortgages (HECMs)
Home Equity Conversion Mortgages (HECMs) are underpinned by the federal government. They are the most widely available form of reverse mortgage and offer broad flexibility, as the funds can be used for any purpose. However, it’s important to note that HECMs are generally more expensive than conventional home loans, often involving substantial upfront costs.
Mandatory counseling is required before applying for a HECM. This counseling is designed to ensure that the homeowner is comprehensively informed about all associated costs, available payment structures, and their ongoing responsibilities. During these sessions, interested individuals are also apprised of any eligible non-profit or government-issued alternative programs. A fee is typically charged for the counseling session, which can be covered by the loan proceeds.
Following the counseling session, you will be informed of the maximum amount you can borrow with a HECM. This sum is determined by factors including your age, the appraised value of your home, and prevailing interest rates. Generally, older borrowers with higher home equity will qualify for larger loan amounts.
Once the loan is approved, borrowers can select from several disbursement options:
- An initial lump sum payment.
- A “term” option providing regular monthly cash advances for a specified duration.
- A “tenure” option delivering monthly advances for as long as the home remains your primary residence.
- A “credit line” allowing you to draw funds as needed at any time.
- A combination approach, such as a credit line paired with monthly payments.
Should your circumstances change over time, you can modify your payment option for a nominal fee.
IMPORTANT NOTE ON DISCRIMINATION: Mortgage lending discrimination is illegal. If you suspect you have been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, recourse is available. You can file a report with the Consumer Financial Protection Bureau (CFPB) or HUD.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are issued by private lenders and do not have government backing. These loans can be advantageous for homeowners whose properties are appraised at higher values and who wish to access more capital than the limits imposed on HECMs. The current lending limit for HECMs stands at $1,149,825.
Counseling may sometimes be required before applying for a proprietary reverse mortgage, which can be beneficial for comparing the costs and benefits of a proprietary loan versus a HECM. The payment disbursement options are similar to those for a HECM, allowing you to choose between a lump sum or a series of ongoing payments.
Since proprietary reverse mortgages lack federal insurance, they do not incur upfront or monthly mortgage insurance premiums (MIPs), unlike HECMs. While this absence of MIPs can potentially lead to cost savings, whether a proprietary mortgage truly offers a better deal will ultimately depend on its specific interest rate and closing costs.
Equity Requirements for a Reverse Mortgage
As a general guideline, homeowners typically need to possess at least 50% equity in their home to qualify for a reverse mortgage.
Reverse Mortgage Post-Mortem: What Happens After Death?
Upon your death, your reverse mortgage becomes due. Your heirs have the option to either repay the loan using their own funds or sell the home to satisfy the debt. If neither of these actions occurs, the lender retains the right to sell the home to recover the outstanding loan amount.
Selecting the Optimal Reverse Mortgage Option
If your need is for a fixed amount to cover a specific repair or a tax obligation, a single-purpose reverse mortgage presents the most economical choice, provided one is available in your area. For individuals with high-value properties who aim to borrow more than the HECM limit allows, a proprietary reverse mortgage might be the most suitable option. In most other scenarios, a HECM is likely to be your best bet.
Can a Home with a Reverse Mortgage Face Foreclosure?
Yes, a home with a reverse mortgage is still subject to foreclosure. This can occur if the homeowner moves out of the property. Even if they remain in the home, foreclosure can be initiated if they fail to maintain the property in good repair or neglect to pay their homeowners insurance premiums or property taxes.
The Bottom Line
Reverse mortgages can serve as a viable option for homeowners seeking to tap into their home’s equity without the need to sell the property or relocate. However, these loans can be expensive. It’s crucial to explore alternative financing solutions, such as a home equity loan or a home equity line of credit, which might be more suitable depending on your individual circumstances, before committing to a reverse mortgage.