Are There Different Types of Reverse Mortgages?

There are three types of reverse mortgages, each with its own unique benefits: single-purpose reverse mortgage, proprietary reverse mortgage and home equity conversion. The following information can assist homeowners in deciding which reverse mortgage best suits their needs. 

Single Purpose Reverse Mortgages

These loans are backed by government agencies and non-profit organizations and are the cheapest option for homeowners who wish to leverage their home equity for a single lender-approved purpose. Typical uses include paying property taxes or making home improvements. 

Homeowners over the age of 62 with moderate or low incomes can take advantage of the single-purpose reverse mortgage. However, they are not available everywhere, and recipients are restricted in what they can do with the proceeds.

Proprietary Reverse Mortgage

Proprietary Reverse Mortgages are sometimes referred to as jumbo reverse mortgages since they’re a favorite of senior homeowners looking for more money than a federally insured reverse mortgage can provide. These private loans are backed by the providing lenders and there are no restrictions on the use of funds.

Another advantage is there are no upfront mortgage insurance fees to pay, as they’re not federally insured. However, because of the higher risk to the lender, they offer fewer protections and interest rates can be as high as 6%.

Home Equity Conversion Mortgage

HECMs are federally insured mortgages backed by the U.S. Department of Housing and Urban Development. They allow seniors aged 62 and over to turn the equity in their homes into cash. As a rule, the more equity someone has in their home, the less they owe and the older they are, the more money they can borrow.

Applicants should be aware that these mortgages can be more expensive than traditional loans. They may also require more upfront fees. The borrower must meet the following requirements set out by the FHA to be approved for a loan:

• Be at least 62 years old.
• Own the property or have paid off a significant portion of the mortgage.
• Be current on any federal debts.
• Have the ability to pay ongoing property charges such as property taxes, insurance and homeowner association fees on time.
• Attend a consumer education session provided by a Housing and Urban Development-approved HECM counselor.
• Use the property as the principal residence.
  

Home equity conversion mortgages are the most widely used of all three reverse mortgages since they have no income restrictions, no medical requirements and can be used for any purpose.