Types of Reverse Mortgages
Reverse Mortgages, available to those 62 years of age or older, are often used to help pay off traditional “forward” mortgages, pay for home repairs, accommodate health care expenses, or as a additional way to add to or supplement income, along with many other purposes. There are three types of reverse mortgages. These include a Single Purpose Reverse Mortgage, a Home Equity Conversion Mortgage, and a Proprietary Reverse Mortgage.
Single Purpose Reverse Mortgage: This type of reverse mortgage is a home loan given by the state, local agencies, or non-profits and is used solely for one specific purpose that is approved by the lender. This often ranges from home repairs to paying off property taxes, but the use of proceeds from this type of loan must be endorsed by the lender and must be for only one function.
Single Purpose Reverse Mortgages do not have to be repaid until you pass away, the ownership of the home changes, until you no longer use the home as the primary residence, if you cease paying property insurance or if the house is condemned by the local municipality.
This type of reverse mortgage is considered the least expensive, however, not as common as other types of reverse mortgages.
Proprietary Reverse Mortgage: are privately backed home loans. In other words, these types of reverse mortgages are not federally insured and for that reason, can exceed the 2018 $679,650 lending limit. Because of this, a Proprietary Reverse Mortgage, also known as a jumbo reverse mortgage is geared towards homeowners with high valued homes, and the borrowing limit is set to what the lender is willing to risk. The purposes for these types of reverse mortgages are not limited by a lender like in a Single Purpose Reverse Mortgage.
In terms of reverse mortgage options, Proprietary Reverse Mortgages allow for you to borrow more than an HECM because there are no monthly mortgages insurance premiums. Are proprietary Reverse Mortgages a better option? Not necessarily. Lenders in a proprietary reverse mortgage often charge higher interest rates to help make up for the lack of insurance.
Like all types of reverse mortgages, payment for a proprietary reverse mortgage is not due until the property is no longer the primary residence, or until the borrower has passed away.
Home Equity Conversion Mortgage: or a HECM loan is the most common type of reverse mortgage. Unlike the other two types of reverse mortgages, this loan is federally insured by the FHA. And unlike single purpose reverse mortgages, a HECM loan can be used for any purpose desired without limitations on income.
Required: Reverse mortgage counseling - When applying for the FHA reverse mortgage, reverse mortgage counseling with a government-approved agency is required so that you can understand the financial requirements and implications involved with this type of reverse mortgage, as well as alternatives, if a HECM is not the right option.
If after the counseling, you decide to apply for a HECM mortgage, you are made aware of how much you can borrow with this type of Reverse Mortgage. The factors limiting the amount you can borrow are dependent upon age, the value of your home, and current interest rates.
There are several different options for payment in a Home Equity Conversion Mortgage. These include:
- A fixed rate payment plan: a single-disbursement lump-sum payment
- A tenure payment plan: monthly advances for as long as the home is the primary residence
- A term payment plan: monthly advanced for a specific amount of time
- A line of credit: allowing for withdrawal at any desired time
- A modified tenure plan: a line of credit and monthly payments for as long as the home is the primary residence
- A modified term plan: a line of credit and monthly payments for a specific amount of time