Reverse mortgages are financial products that have been around in America for over half a century. They were first introduced by the Maine-based bank, and they came under supervision from HUD in 1987.
Reverse mortgages are a loan that work differently than traditional ones. They allow older homeowners to borrow money by using their homes as security, and repayment isn’t necessary until you die or move out of state- which could be useful if the person wants continued financial stability but doesn’t want it at risk from fluctuations in housing prices across states.
The three types of reverse mortgages are the single-purpose, federally insured and proprietary. These loans come with different features but they all have one thing in common: You can borrow against your home equity to supplement or replace some income if you’re aging into retirement without selling up.
Key Points:
- Reverse mortgages provide individuals aged 62 and over with income with a loan using the equity in their homes.
- The three types of reverse mortgage loans are single-purpose reverse mortgages, federally-insured reverse mortgages, and proprietary reverse mortgages.
- Single-purpose reverse mortgages, which are offered by state, local, and nonprofit agencies, are the cheapest and least common form of reverse mortgages around.
- Home equity conversion mortgages are federally insured products that are backed by the U.S. Department of Housing and Urban Development.
- Proprietary reverse mortgages are used by homeowners whose homes are appraised at high values.
Single-purpose reverse Mortgages:
The single-purpose reverse mortgage is the least expensive option for a loan because it’s backed by government and nonprofit sources. This means that homeowners can expect to pay less in interest, fees, or both when taking out this kind of arrangement compared with other options available on mortgages today.
This kind of loan is the least common among the three types and isn’t available in every state. It works a little differently than home equity loans, which can be used for any purpose. Single-purpose reverse mortgage lenders restrict how the proceeds can be used. As the name implies, homeowners can only use them for a single, lender-approved item, such as necessary repairs to the home or property taxes.
But while equity loans require monthly installment payments, single-purpose reverse mortgages don’t have to be repaid unless the home’s ownership changes, the borrower moves to a different main residence, or the borrower passes away.
Home Equity Conversion Mortgages
Home equity conversion mortgages, or HECMs for short are a type of loan that comes with high upfront costs and can be expensive than traditional home loan. These loans are federally backed by HUD. This is the most popular reverse mortgage because it has no income limitations nor medical requirements to use the funds from this loan.
Homeowners need to be properly counseled before applying for this mortgage. This ensures that the homeowner is aware of all costs and responsibilities involved, as well any nonprofit or government-issued alternatives they may have access too! There’s a charge associated with counseling sessions which can come from your loan funds.
After the counseling session, you find out how much money is available to borrow with a FHECM. Your age and current interest rates determine what size loan works best for your situation – but there are some other factors too! Owing as little as possible puts the homeowner in the best situation.
When the loan is established, you can choose between several payment options. There’s a term option that allots monthly cash advances for specific time while tenure pays off as long as your home remains in primary residence and credit line lets draw from account at any point. There are also combinations of both types.
Proprietary Reverse Mortgages
The proprietary reverse mortgage is an excellent option for homeowners who want more money, and whose homes are appraised at higher values. This means you may qualify if your property falls above the value limits of $822 375 on federally backed HECMs.
People with low mortgage balances will qualify for more funds. Counseling is sometimes required before applying, which can help provide a comparison between the costs and benefits of a proprietary loan and a HECM. Payment works the same way as the HECM option, which means you can choose a lump sum or series of monthly payments.
A proprietary reverse mortgage has no up-front or monthly mortgage insurance premiums, which means you can probably borrow more. Whether this makes it better than a HECM form of loan depends on how much the lender is willing to advance based in part on your home’s value for compensation – but keep these things considered!
Make sure you investigate both if you’re considering a proprietary reverse mortgage. Compare the interest rates and fees from several proprietary reverse mortgage lenders and gather quotes from several HECM providers to see which option gives you the best deal. Your age and how far above HECM limits your home’s value is will also influence which one will be the better deal.