As a relatively new financial tool, the reverse mortgage has undergone numerous changes and government interventions since its creation in the latter half of the twentieth century. Reverse mortgages have established a foothold in the financial industry. Homeowners 62 and older should be aware that there are a few different types of reverse mortgages available, each with its own set of qualities to consider.
The Single-Purpose Reverse Mortgage
Offered by some state and local government organizations as well as non-profit organizations, these reverse mortgages are among the least expensive of all three options. However, they are not available everywhere, and they come with strings attached. These loans may only be used for one purpose (as indicated by the description, “single-purpose”) and as such, that purpose is subject to the lender’s discretion. For instance, the lender may decide that the loan may only be used to pay for property taxes, home repairs, or home improvements. To qualify for this type of reverse mortgage, most prospective borrowers must have low to moderate income and must also satisfy each lending organization’s unique and varied requirements.
The Proprietary Reverse Mortgage
As private loans backed by the companies that offer them, these loans are the least secure among these three options. If you possess a home with a very high value, you may be able to receive more proceeds with this type of loan, but you will also be forfeiting many of the regulations and safeguarding procedures that accompany a government-backed reverse mortgage.
The Home Equity Conversion Mortgage (HECM)
Insured by the Federal Housing Administration (FHA) and overseen by the U.S. Department of Housing and Urban Development (HUD), HECMs are the most strictly regulated of these three options. For example, before applying for a HECM, all prospective borrowers must meet with a counselor from an independent, government-approved housing counseling agency. The federal insurance also makes the loan a non-recourse loan, meaning you will never owe more than your home is worth. The insurance also secures that you receive your loan proceeds in the event that your lender goes out of business.
Additionally, HECMs do not have barriers to entry for those without a certain level of income or credit, but proprietary lenders may demand that borrowers meet more rigorous thresholds. That said, the HECM process still involves a financial assessment procedure to ensure borrowers are able to pay uphold the financial responsibilities of the loan. Based on the results of this assessment, HECM borrowers may be required to set aside funds from the loan proceeds in order to pay for necessities such as property taxes, insurance, and maintenance costs. For example, homes in certain areas may also require flood insurance or other specific types of insurance as applicable.
While proprietary and single-purpose loans may offer only one or two means of receiving loan proceeds, the HECM allows homeowners to choose from the following options:
- Fixed-Rate Product
- Single-disbursement lump sum
- Variable-Rate Products
- “Term” payments – These are fixed monthly cash advances that will continue for a specified period.
- “Tenure” payments – These are fixed monthly cash advances that will continue as long as you continue to live in your home and honor all tax, insurance, and maintenance agreements.
- A line of credit – This option allows your available proceeds to potentially grow over time and be drawn down as you see fit. Borrowers may later decide to begin taking monthly payments or a lump sum as desired.
Deciding whether a reverse mortgage is right for you is not a simple decision. There are many factors to consider, such as which type of reverse mortgage will best suit your needs. While there are niche circumstances in which proprietary and single-purpose loans may be preferable, most borrowers will likely find HECMs to be the most suitable option. It is a good idea to talk to your financial advisor before making any big financial decisions.