What Are The 3 Types Of Reverse Mortgages

Understanding the Three Types of Reverse Mortgages

Imagine this: you’ve worked hard all your life, and now you’re sitting on a house that’s worth more than you ever thought possible. Maybe you’re looking at retirement, or perhaps you just want to ease some financial stress. A reverse mortgage might pop into your mind as a potential solution. But what exactly are reverse mortgages, and what types exist? In this guide, you’ll learn about the three main types of reverse mortgages—Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. We’ll break down how each one works, who they’re best for, and real-world examples to help clarify things.

What is a Reverse Mortgage?

Before we get into the types, let’s quickly clarify what a reverse mortgage is. Basically, it’s a loan that allows homeowners aged 62 or older to convert part of their home equity into cash. You don’t have to make monthly payments like a traditional mortgage. Instead, the loan is repaid when you sell the house, move out, or pass away. This can be a great way to access funds for retirement, healthcare, or any other expenses.

How It Works

To qualify, you’ll need to have sufficient equity in your home. For instance, if your home is valued at $300,000 and you’ve paid off your mortgage, you might be able to access a substantial portion of that equity. The exact amount you can borrow depends on several factors, including your age, the current interest rates, and the appraised value of your home.

Home Equity Conversion Mortgages (HECMs)

What are HECMs?

HECMs are by far the most common type of reverse mortgage. They’re insured by the Federal Housing Administration (FHA), which means that they have to meet certain standards and guidelines. If you’re looking for a secure option, this might be the way to go.

Who Should Consider HECMs?

If you’re a homeowner aged 62 or older with significant equity in your home, HECMs can provide you with a reliable source of cash. For example, let’s say Ellen, a 67-year-old retiree, owns a home valued at $400,000 and has no mortgage. She could potentially access around $200,000 through a HECM, giving her the freedom to travel or cover unexpected medical expenses.

Pros and Cons

The main advantage of HECMs is the government backing, which often results in lower interest rates and fees. However, they also come with some downsides. There are upfront costs, including mortgage insurance premiums and closing costs, which can total between $10,000 and $15,000. Plus, you’ll need to keep up with property taxes, homeowners insurance, and maintenance.

Proprietary Reverse Mortgages

What are Proprietary Reverse Mortgages?

Proprietary reverse mortgages are private loans that are not backed by the government. These are typically offered by private lenders and can be a good option for those with higher-value homes.

Who Should Consider Proprietary Loans?

If you’ve got a home valued at over $1 million, a proprietary reverse mortgage could be a good fit. For instance, consider John and Sarah, a couple in their late 60s. They live in a luxury home in California worth $1.5 million. Through a proprietary reverse mortgage, they could access a larger portion of their home equity compared to a HECM.

Pros and Cons

One of the biggest benefits of proprietary loans is that they often allow for higher loan amounts. However, they may come with higher fees and less flexibility than HECMs. Additionally, since these aren’t federally insured, there’s a bit more risk involved.

Single-Purpose Reverse Mortgages

What are Single-Purpose Reverse Mortgages?

As the name suggests, single-purpose reverse mortgages are designed for a specific use, often for home repairs or property taxes. These loans are usually offered by state or local government agencies and non-profits.

Who Should Consider Single-Purpose Loans?

If you need a loan specifically for home repairs, a single-purpose reverse mortgage might be the best fit. For example, let’s say Maria, a 72-year-old homeowner, needs $15,000 to fix her roof. By taking out a single-purpose reverse mortgage, she can access that cash without taking on additional debt.

Pros and Cons

The biggest upside of single-purpose loans is that they tend to have lower fees than other reverse mortgage types. However, they can be quite restrictive since the funds can only be used for the specified purpose. If you need flexibility in how you use the funds, this might not be the best option.

Choosing the Right Type for You

Factors to Consider

When choosing which type of reverse mortgage is right for you, think about your financial needs, your home’s value, and how you plan to use the funds. If you want flexibility and are eligible, a HECM might be your best bet. If you’ve got a high-value home and want to access more cash, consider a proprietary loan. If you have a specific need, like home repairs, a single-purpose mortgage could be the way to go.

Real-World Scenarios

1. Ellen’s HECM: As mentioned earlier, Ellen takes out a HECM to access $200,000. She uses this money to travel, enjoy her retirement, and even help her granddaughter with college expenses. Ellen is relieved to have this financial cushion without worrying about monthly payments.

2. John and Sarah’s Proprietary Loan: John and Sarah decide to go the proprietary route, getting a loan for $800,000. They use the funds to invest in a vacation home while still living comfortably in their primary residence, allowing them to enjoy life without financial stress.

3. Maria’s Single-Purpose Loan: Maria, needing $15,000 for her roof, finds a local government program offering a single-purpose reverse mortgage. She gets the funds quickly and has her roof repaired, ensuring her home stays safe and comfortable.

FAQs About Reverse Mortgages

1. Can I lose my home with a reverse mortgage?

Yes, you can lose your home if you fail to meet the responsibilities tied to the loan, such as paying property taxes, homeowners insurance, and maintaining the property. If these obligations are neglected, the lender may foreclose on your home.

2. How much can I borrow with a reverse mortgage?

The amount you can borrow depends on your age, the home’s value, and current interest rates. For instance, if you’re 70 and your home is valued at $300,000, you might access around $150,000 to $180,000 through a HECM.

3. Are reverse mortgages taxable?

No, reverse mortgage proceeds aren’t considered taxable income since they’re loans, not earnings. However, you should consult with a tax professional for personalized advice.

4. Can I refinance a reverse mortgage?

Yes, you can refinance a reverse mortgage. If your financial situation changes or interest rates drop, refinancing might be a smart move. Check out our article on can a reverse mortgage be refinanced? for more details.

5. Can you do a reverse mortgage on a condo?

Yes, you can do a reverse mortgage on a condo, but it must be FHA-approved. If you own a condo and are considering this option, our article on can you do a reverse mortgage on a condo? can provide further insights.

Next Steps

So, you’ve learned about the three types of reverse mortgages—HECMs, proprietary loans, and single-purpose loans. Each has its benefits and drawbacks, so it’s essential to consider your financial situation and goals. If you think a reverse mortgage might be right for you, start by talking to a financial advisor. They can help you weigh your options and decide the best route to take. Also, don’t forget to do your homework and compare lenders to find the best terms.

Remember, accessing your home’s equity is a significant decision. Take your time, ask questions, and make sure you’re informed before moving forward.