What are the 3 types of reverse mortgages?

By HotBotUpdated: August 22, 2024

Understanding Reverse Mortgages

Reverse mortgages are financial products that allow homeowners, typically seniors, to access the equity in their homes without having to sell the property or make monthly mortgage payments. Instead, the loan is repaid when the homeowner moves out, sells the house, or passes away. There are three primary types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages. Each type has unique features, benefits, and qualifications.

Home Equity Conversion Mortgages (HECMs)

HECMs are the most common type of reverse mortgage and are federally insured by the Federal Housing Administration (FHA). These loans are available to homeowners aged 62 or older and come with a variety of options and consumer protections.

Eligibility and Requirements

To qualify for an HECM, homeowners must meet several criteria:

- Be at least 62 years old.

- Own the home outright or have a low mortgage balance that can be paid off with the loan proceeds.

- Live in the home as their primary residence.

- Attend a counseling session with a HUD-approved counselor to ensure they understand the loan's terms and obligations.

Loan Amount and Payout Options

The amount a homeowner can borrow through an HECM depends on several factors, including the home’s appraised value, the homeowner’s age, and current interest rates. HECMs offer multiple payout options:

- Lump Sum: A single disbursement of funds at closing.

- Tenure: Fixed monthly payments for as long as the homeowner lives in the home.

- Term: Fixed monthly payments for a specified period.

- Line of Credit: Funds are available as needed up to a pre-determined limit.

- Modified Tenure/Term: A combination of a line of credit and fixed monthly payments.

Consumer Protections

HECMs come with several consumer protections, including:

- Non-recourse Loan: Homeowners or their heirs will never owe more than the home's appraised value at sale.

- Mandatory Counseling: Ensures borrowers understand the financial implications of the loan.

- Mortgage Insurance: Protects both the borrower and the lender in case the loan balance exceeds the home's value.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loans offered by financial institutions and are not insured by the FHA. These loans are designed for homeowners with high-value properties and can offer larger loan amounts than HECMs.

Eligibility and Requirements

Eligibility criteria for proprietary reverse mortgages are similar to HECMs but can vary by lender:

- Generally, borrowers must be at least 62 years old, though some lenders may have different age requirements.

- The home must be the borrower’s primary residence.

- The home typically needs to be a high-value property, often appraised at $1 million or more.

Loan Amount and Payout Options

Proprietary reverse mortgages often allow for larger loan amounts than HECMs, making them suitable for homeowners with significant home equity. Payout options may include:

- Lump Sum: A single disbursement of funds at closing.

- Line of Credit: Funds available as needed.

Consumer Protections

Unlike HECMs, proprietary reverse mortgages do not have federally mandated consumer protections. However, reputable lenders often offer similar safeguards, such as non-recourse clauses and mandatory counseling. Borrowers should carefully review the terms and seek independent advice before proceeding.

Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages are the least common type and are typically offered by state and local government agencies or non-profit organizations. These loans are designed for specific purposes, such as home repairs, property taxes, or insurance payments.

Eligibility and Requirements

Eligibility criteria can vary widely depending on the program, but generally include:

- Age requirements, often 62 or older.

- Homeownership and primary residence status.

- Income limits, as these loans are often intended for low- to moderate-income homeowners.

Loan Amount and Payout Options

Single-purpose reverse mortgages usually offer smaller loan amounts compared to HECMs and proprietary reverse mortgages. The funds must be used for the specified purpose, as defined by the lender or program, such as:

- Home repairs and improvements.

- Payment of property taxes.

- Payment of homeowner’s insurance premiums.

Consumer Protections

These loans often come with fewer consumer protections than HECMs but can provide a valuable option for homeowners who need financial assistance for specific needs. Borrowers should ensure they understand the loan's terms and any conditions on the use of funds.

Comparing the Three Types of Reverse Mortgages

Each type of reverse mortgage serves different needs and has unique features:

- HECMs are the most versatile and widely used reverse mortgages, offering various payout options and strong consumer protections.

- Proprietary reverse mortgages are suitable for homeowners with high-value properties who need larger loan amounts. They offer flexibility but lack federal insurance.

- Single-purpose reverse mortgages are ideal for homeowners with specific financial needs and often have lower costs, but the funds are restricted to certain uses.

Homeowners considering a reverse mortgage should carefully evaluate their financial situation, goals, and the specific terms of each loan type to determine the best option for their needs.

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