What Are the 3 Types of Reverse Mortgages

As homeowners grow older, financial security can definitely become a point of concern. It’s particularly true when considering the costs of healthcare, everyday living, and home maintenance. 

Thankfully, most retirees possess one valuable financial asset – a home. Utilizing home equity through financial tools like reverse mortgages can create a path that eases financial burdens and bolsters reserves. Now, what exactly is a reverse mortgage? What are the 3 types of reverse mortgages available? 

We’ll take you through the 3 types of reverse mortgages and explain everything you need to know about this complex financial product. 

How Reverse Mortgages Work 

A reverse mortgage lets a homeowner tap into their equity for cash. They can do this without selling their homes or making monthly payments. With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. After that, the loan is repaid when the homeowner sells the property, moves out, or passes away. 

• Requirements: To qualify for a reverse mortgage, borrowers have to be at least 62 years old, live in the home as their primary residence, undergo a financial assessment, own their property outright, or have a large amount of equity. 

• Conditions: As part of the loan terms, borrowers must continue to live in the home as their primary residence, keep the property in good condition, and pay property taxes and homeowners’ insurance throughout the life of the loan. 

• Repayment: Repayment typically happens when the borrower passes away, sells the home, or no longer resides in the house for more than 12 consecutive months. However, it’s possible to get out of a reverse mortgage earlier. 

• Heirs: If the homeowner passes away, the heirs can either repay the loan to keep the house or sell the home to pay off the debt. 

The 3 Types of Reverse Mortgages 

So, what are the 3 types of reverse mortgages? Generally, each type of reverse mortgage works similarly. They have comparable requirements and conditions. However, specific features can make all the difference in your journey to securing financing. 

Home Equity Conversion Mortgages (HECMs) 

 The Federal Housing Administration (FHA) insures HECM loans. The U.S. Department of Housing and Urban Development (HUD) also regulates the loans. 

 You have to complete a HUD-approved counseling session to ensure a total understanding of costs, payment options, and responsibilities before proceeding. Counselors can also provide information about relevant alternatives, such as non-profit or government grants and programs, during the session. 

 Home value and current FHA lending limits determine the maximum borrowing amount you’re eligible for. 

 Key characteristics of HECMs: 

• High Flexibility: Funds can be received as a lump sum, line of credit, fixed monthly payments, or a combination of these options. Furthermore, the funds can be used for any purpose. 

• Government-Insured: As the federal government backs HECMs, you stay protected if something happens to your reverse mortgage broker California or they go out of business. 

• Non-Recourse Loan: With a HECM, you or your heirs will never owe more than the value of the home at the time the loan is repaid, even if the loan balance exceeds the home value. 

• Extra Costs: Unlike other types of reverse mortgages, HECMs require upfront and annual mortgage insurance premium expenses. 

 Single-Purpose Reverse Mortgages 

 Do you need money to cover a home-related expense? If so, a single-purpose reverse mortgage may be worth considering. These loans are tailored to meet a specific need, such as tackling home repairs or paying property taxes. Single-purpose reverse mortgages are offered by some state and local governments, nonprofit organizations, and credit unions. 

 The characteristics of single-purpose reverse mortgages are: 

• Less Expensive: Single-purpose reverse mortgages are backed by the government and nonprofits. It means they tend to have lower fees and rates. 

• Low Flexibility: The loan amount is usually smaller, and the funds can only be used for the designated purpose. 

• Targeted Assistance: If your income is too low to qualify for other types of loans, a single-purpose loan may be a lifeline. 

• Not Widely Available: They’re less common than other types of reverse mortgages because they’re generally reserved for low-income homeowners. 

 Proprietary Reverse Mortgages

 If you reside at a location where the cost-of-living is too high, such as San Francisco or New York, you may want to tap more equity than a HEMC will allow. In such a situation, a proprietary reverse mortgage may be a better option. It’s also called a jumbo reverse mortgage. 

 A proprietary reverse mortgage is a private loan uninsured by the federal government. It’s available to homeowners with high-value homes who want to use the funds to accomplish any number of financial goals. 

 The characteristics of proprietary reverse mortgages are: 

•  High Flexibility: You can unlock more of your equity and use it as you need. 
• More Expensive: Proprietary reverse mortgages typically have higher interest rates and fees than other types of reverse mortgages. 
• Steeper Requirements: Not only will you need a high-value home, but you’ll also need to own much of the equity in the property. 

• Non-FHA Insured: These loans have fewer homeowner protections and are generally not non-recourse loans. 

Reverse Mortgage Alternatives 

Home Equity Investment

 Many homeowners find reverse mortgages attractive because they offer no monthly payments and have less stringent requirements than home equity loans or home equity lines of credit. 

 An equity product that offers the same features is a home equity investment (HEI). An HEI provides homeowners a lump sum of cash with no monthly payments in exchange for a share of the home’s future appreciation. Homeowners have a flexible 30-year term and can settle their investment whenever they sell the home, refinance, or use alternative funds (reverse mortgage funds included). 

 There are no income requirements, and homeowners need a credit score above 500 to qualify. However, unlike a reverse mortgage, there are no age restrictions, use-of-fund restrictions, or stringent conditions throughout the partnership. HEIs also require less owned equity and don’t require you to pay off your first mortgage with the proceeds. 

 Home Equity Line of Credit

 A home equity line of credit (HELOC) offers homeowners a revolving credit line that works similarly to a credit card secured by the equity in their home. There’s a 5 to 10-year draw period, where you’re on the hook for interest-only payments. Once the draw period ends and the repayment period begins, you’ll repay the principal plus interest via monthly payments over a 20-year term. 

 Unlike reverse mortgages and home equity investments, requirements are stricter. You’ll need a credit score of at least 620, a debt-to-income ratio (DTI) of 43% or less, and sufficient income. However, HELOCs require less equity than reverse mortgages – you generally need 15% to 20% to qualify. 

 Home Equity Loan

 A home equity loan is another popular reverse mortgage alternative. It allows you to access your equity for a lump sum of cash. You’ll repay the loan via fixed monthly payments over a 5 to 30-year term. 

 You’ll generally need a credit score of 620, a DTI of 45% or lower, and sufficient income to qualify. 

Wrapping Up 

What are the 3 types of reverse mortgages? We’ve already explained all 3. All 3 options offer an accessible way for homeowners to access the equity in their homes and come with significant considerations. 

Whether you’re considering a HECM, a single-purpose reverse mortgage, or a proprietary reverse mortgage, it’s essential to understand the terms and weigh your options carefully. Before deciding, consult with a reverse mortgage broker California to determine the best option for your financial situation. 

FAQs 

1. Can a reverse mortgage affect eligibility for government benefits?

Reverse mortgage funds may impact needs-based benefits like Medicaid or SSI if not managed carefully. Social Security and Medicare usually remain unaffected when proceeds are used properly. 

2. Can you refinance or change a reverse mortgage later?

Yes, some homeowners refinance a reverse mortgage to access more equity or adjust terms, depending on home value changes, interest rates, and updated eligibility requirements. 

3. Do reverse mortgages have interest that builds over time?

Interest accrues over the life of the loan and adds to the balance monthly. Because no payments are required, the total owed typically grows until repayment occurs. 

4. What happens if the home value drops below the loan balance?

With certain reverse mortgages, repayment never exceeds the home’s value. Heirs can settle the loan by selling the property without owing additional funds. 

5. Can you sell your home while having a reverse mortgage?

Yes, homeowners can sell their property at any time. Sale proceeds first repay the loan balance, and any remaining equity belongs to the homeowner or their heirs.