Types of Reverse Mortgages

·7 min read

A reverse mortgage can be a crucial way to meet your expenses in retirement. With these loans, your lender actually pays you, using the equity you’ve built in your home over time.

You’ll need to meet some strict criteria to qualify for a reverse mortgage — and ultimately, all of the money you borrow will need to be paid back.

Let’s go over the most common types of reverse mortgages and how they work:

  • How a reverse mortgage is different than a traditional mortgage

  • Home equity conversion mortgage (HECM)

  • Proprietary reverse mortgage

  • Single-purpose reverse mortgage

  • What to consider when shopping for a reverse mortgage

How a reverse mortgage is different than a traditional mortgage

With a traditional mortgage, you make monthly payments until you eventually pay back the entire loan, with interest.

A reverse mortgage works just the opposite. Your lender pays you — either with a lump sum, line of credit, or monthly payments — and your loan balance actually grows over time. You generally won’t need to pay the money back until you pass away or move out of the home. At that point, you or your heirs will usually need to sell the home to pay back the amount you borrowed, plus interest and fees that have accumulated.

Reverse mortgage fees typically include an origination fee, an upfront mortgage insurance premium at closing, and annual insurance premiums for each year you have the loan.

Home equity conversion mortgage (HECM)

The most common type of reverse mortgage is the home equity conversion mortgage (HECM), a program insured and regulated by the U.S. Department of Housing and Urban Development (HUD) through the Federal Housing Authority. These loans are designed to help seniors meet living expenses in retirement.

Like other mortgage loans, HECM loans can have fixed or adjustable rates. With a fixed-rate loan, you’ll get a lump sum based on your home equity. An adjustable-rate home equity conversion mortgage allows you to choose from a range of payment options. These include:

  • Monthly payments for a fixed period of time (also known as a “term” option)

  • Monthly payments for as long as you live in the home (also known as a “tenure” option)

  • Line of credit

  • A combination of a line of credit and fixed monthly payments

To qualify for a HECM, you must:

  • Be age 62 or older

  • Own the home outright or have a small mortgage balance

  • Live in the home as your primary residence

  • Be up to date on any federal debt, like student loans or taxes

  • Demonstrate you can afford to pay for property taxes and general upkeep of the home

  • Meet with an approved HECM counselor to help you weigh your decision

HECMs also have a borrowing limit of $970,800, according to HUD.

You may choose to take out a reverse mortgage loan if your savings and Social Security aren’t adequate to meet your expenses in retirement. However, if you’re hoping to leave your home to family members when you pass away, you may want to consider other options.

Tip: If you end up owing more on your reverse mortgage than your home is worth, your lender cannot require you to pay more than the appraised value of the home. That’s when the mortgage insurance kicks in.

HECM for purchase

While many seniors use a reverse mortgage to stay in their current home, you can also use the HECM program to buy a new home.

You’ll need to have enough cash to make a large down payment — typically about 50% of the sale price — and pay for closing costs. But once the loan closes, it functions just like any other reverse mortgage. You won’t need to make monthly mortgage payments, but you must live in the home as your principal residence and keep up with taxes, homeowners insurance, and maintenance.

Why would I consider a HECM for purchase? A HECM for purchase can be a good option if you’re downsizing in retirement. You may be able to sell your current home to raise the cash for a down payment on a smaller home, then use the HECM to meet your expenses.

The HECM for purchase program also allows you to buy a home in a new, more desirable area without needing to make mortgage payments.

While there are a number of upsides to a HECM for purchase, there are some downsides as well. Closing costs on a HECM for purchase loan are higher than many other types of reverse mortgage loans. The large down payment needed may also leave you without as much cash as you’d like to have.

Don’t Miss: How to Pay Back a Reverse Mortgage

Proprietary reverse mortgage

If your property is worth more than the HECM mortgage limit, you may choose a proprietary reverse mortgage. These loans are backed by private lenders, not by the federal government. They’re generally offered to people with more expensive home values that would be subject to HECM loan limits. You may hear them referred to as “jumbo reverse mortgages.”

Eligibility requirements vary based on the lender. Like a HECM, the amount you can borrow with a proprietary reverse mortgage is based on:

  • Your age

  • The value of your home

  • Interest rates

  • Your ability to pay for property taxes, homeowners insurance, and upkeep of the home

As you would with a HECM, you generally only need to repay the proprietary reverse mortgage when you pass away or move out of the home. But qualification criteria, how you access your money, and the fees you’ll pay are all set by the individual lender issuing the loan.

Good to know: Your state may have laws governing what proprietary reverse mortgage lenders can offer. You may also need to go through a housing counseling session.

Proprietary reverse mortgages generally cost more and offer you a smaller loan relative to your home value than a HECM does. Also, keep in mind the more money you borrow, the more fees you’ll pay.

You won’t find reverse mortgage loans at Credible, but if you’re looking for a great rate on a conventional refinance loan, including a cash-out refinance, we can help with that. It only takes a few minutes to compare personalized, prequalified refinance rates from all of our partner lenders.

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Single-purpose reverse mortgage

Some local governments or nonprofits may offer a type of reverse mortgage that can only be used for a specific reason — such as fixing up your home or paying your property taxes. Generally, the federal government doesn’t insure these single-purpose reverse mortgages.

Single-purpose reverse mortgages may only be available to low- or moderate-income people, and may only be available to homeowners living in certain areas.

These loans are generally the cheapest reverse mortgage option. If you’re concerned about the cost of a reverse mortgage and only need to borrow money for a limited reason, they may be a good choice for you.

Tip: A local Area Agency on Aging may be able to help you find a single-purpose reverse mortgage and determine if you’re eligible as a borrower. You can find these agencies at the U.S. Administration on Aging website.

What to consider when shopping for a reverse mortgage

Taking out a reverse mortgage is a significant financial decision, one that can have an impact on your finances for the rest of your life. As you consider whether to borrow, here are some things to keep in mind:

  • How will I use the income from the loan? With a reverse mortgage, your lender pays you, either in installments or as a lump sum. If you plan to use this money for general living expenses, a HECM may be the best option. If you have a specific one-time need, like home repairs or catching up on property taxes, a single-purpose reverse mortgage may be a better fit.

  • How much is my home worth? While a HECM is the most popular type of reverse mortgage, there is a limit to how much you can borrow. If you have a particularly high-valued home, you may need to look into a proprietary reverse mortgage, which has no formal limit on its proceeds.

  • Do I plan to move into assisted living? A reverse mortgage comes due when you pass away or move out of the home. If you see yourself moving into an assisted living home or similar facility, it may not make sense to take out the loan.

  • Do I want to pass down my home? In most cases, you or your heirs will need to sell the home to pay off the reverse mortgage. If you were hoping to keep the home in the family, a reverse mortgage may not be the best choice.

Keep Reading: Reverse Mortgage Alternatives: 5 Options for Seniors