Explained: What Are The Types of Reverse Mortgages?

Retirement should be a time of comfort, not concern. Yet, many find themselves asking, "How will I manage my finances?" Reverse mortgages could be your answer, turning your home equity into a retirement lifeline.

Did you know that over a million Americans have used reverse mortgages to enhance their retirement? It’s a move that could change your golden years. But you’re not sitting on a goldmine…or are you? If you’re over 62 and own a home, the answer might be "yes."

When it comes to retirement planning, homeowners have a unique opportunity to leverage their most valuable asset: their home. Reverse mortgages offer a way to tap into this asset, but understanding the different types available is crucial. 

In this article, you’ll learn how reverse mortgages can transform your home’s equity into a source of income.

What is a Reverse Mortgage?

A reverse mortgage is more than just a loan; it’s a strategic financial tool for homeowners 62 years or older. It allows you to access the equity in your home and convert it into cash, without the immediate burden of monthly payments. 

The repayment of the loan is deferred until the home is sold or the homeowner passes away, making it a flexible option for managing retirement finances.

Why 62 years of age? Because that’s what the age requirement is for reverse mortgages. The amount you can borrow against your home depends on your age and that of your spouse (if applicable). Older borrowers are often allowed to borrow a larger percentage of their home equity.

Single-Purpose Reverse Mortgages

Designed for specific financial needs, single-purpose reverse mortgages are the most straightforward type. They’re typically offered by government agencies for a designated purpose, like home repairs or property taxes. 

Single-purpose reverse mortgages are loans that allow seniors to convert part of their home equity into cash that must be used for a specific lender-approved purpose. Unlike more common reverse mortgages, these are not for just any expense. The funds are typically earmarked for home repairs or property taxes.

They can be a cost-effective way to borrow if you need money for a specific purpose and can be easier to qualify for if you have a lower income. While they’re cost-effective, they’re not as flexible as other types and are limited in availability.

Benefits of Single-purpose reverse mortgages:

• Tax-free proceeds: The money received is tax-free.
• Easier qualification: It’s often easier for low or moderate-income seniors to qualify.
• No monthly payments: As long as the loan doesn’t come due, borrowers are not required to make monthly payments.

In a nutshell:

• Single-purpose reverse mortgages are less common than other types.
• They are typically offered by government agencies and nonprofits in specific states.
• Unlike other reverse mortgages, the use of proceeds is restricted and must be approved by the lender.

Home Equity Conversion Mortgages (HECMs) 

HECMs are the most common type of reverse mortgage and issued primarily by the Federal Housing Administration (FHA). They’re federally insured and offer a wide range of disbursement options to suit your needs, whether it’s a lump sum, monthly payments, or a line of credit. It enables homeowners (62+) to convert the equity in their homes into cash without selling the property or making monthly mortgage payments. 

Think of it this way, instead of paying the lender, the lender pays you, using your home equity as collateral. The funds can enhance retirement income, cover expenses, or finance a new home purchase. The repayments are only due when you sell, move out permanently, or pass away—securing your stay in your home.

HECMs are government-backed, unlike proprietary reverse mortgages, they offer added security. HECMs are versatile, but they come with certain conditions and insurance premiums that are important to consider.

HECM vs. Non-HECM:

HECMs are the most popular type of reverse mortgage, backed by the FHA.

Non-HECM loans include jumbo and proprietary reverse mortgages from private lenders and single-purpose reverse mortgages issued by state or local governments or nonprofits.

Proprietary Reverse Mortgages 

For those with higher-valued homes, proprietary reverse mortgages can provide access to larger loan amounts. 

Proprietary reverse mortgages, or jumbo reverse mortgages are private loans that let homeowners with high-value properties borrow against their home equity, often beyond the limits of standard reverse mortgages. Typically, homeowners who are at least 55 years old with significant equity in their homes are eligible. 

These loans can provide access to larger sums of money, up to $4 million, without the need for monthly repayments. Also, these loans are similar to standard reverse mortgages but are designed for higher-value properties that exceed federal loan limits. 

If you have a high-value property and need to access more funds than a standard reverse mortgage offers, a proprietary reverse mortgage would be better suited. These private loans are not federally insured, which means they can be tailored to your individual needs but may carry higher interest rates and fees.

Conclusion 

Reverse mortgages can be a strategic asset for you, as they are for many seniors, offering a pathway to financial flexibility in retirement. However, the decision to tap into your home equity requires a thoughtful approach. It only makes sense if it is tailored to your unique financial landscape and future aspirations.

When considering a reverse mortgage, it’s crucial to weigh the types available against your long-term objectives. Whether it’s fortifying your retirement income, managing unexpected medical expenses, or making home improvements, the right reverse mortgage can serve as a pivotal tool in achieving your goals.

The Home Equity Conversion Mortgage (HECM) is the most prevalent type, backed by the federal government, providing security and peace of mind. On the other hand, proprietary reverse mortgages cater to those with higher-value homes, offering larger loan amounts.

Proprietary reverse mortgages stand out for their ability to provide access to larger loan amounts, surpassing the federal limits imposed on HECMs. This feature is especially beneficial for homeowners whose properties exceed the maximum valuation considered by HECM programs. With proprietary loans, the full value of your high-priced home can be leveraged, ensuring that none of equity is left untapped. Moreover, proprietary reverse mortgages offer a degree of flexibility that caters to a broader range of financial situations. 

Whether it’s the absence of mortgage insurance premiums, the potential for competitive interest rates, or the availability of diverse payment options, these private loans are designed with the homeowner’s autonomy in mind.

Single-purpose reverse mortgages, though less common, present a targeted solution for specific financial needs. Each type of reverse mortgage comes with its nuances—interest rates, fees, and loan limits that can impact the overall benefits. That’s why it’s not just about choosing a reverse mortgage; it’s about selecting the one that aligns seamlessly with your financial tapestry.

A reverse mortgage can be more than just a financial decision; it’s a step towards crafting the retirement you envision. With the right advice and a clear understanding of your personal goals, you can unlock the value of your home equity and secure a more comfortable and confident retirement.