Are you living on a fixed income? Need some help paying bills? A reverse mortgage may be able to help! A reverse mortgage is a loan that enables senior adults, 62 or older, to cash in on acquired home equity. A homeowner is lent money as a line of credit or in one lump sum. Unlike traditional loans, monthly payments aren’t required. Instead, the loan is repaid in full when the home is sold (most commonly when the homeowner passes away).
Considering a reverse mortgage? Start here by first learning about the different types. There are three: home equity conversion mortgages, proprietary reverse mortgages, and single-purpose reverse mortgages.
With no income or medical requirements, a home equity conversion mortgage (HECM) is the most common type of reverse mortgage. HECMs are federally backed loans; insured by the Federal Housing Administration (FHA). They offer lower interest rates than privately insured loans, but often cost more to set up.
HECMs have no specific income limitations, but, lenders will often conduct a financial assessment on potential borrowers before approval. A financial assessment will outline a person’s capability to meet financial obligations.
Remember: Federally insured with few restrictions and low interest.
Proprietary reverse mortgages are private loans. As such, they’re not federally insured. Proprietary reverse mortgages are usually used for larger advances on higher-valued homes. Seniors with a higher appraisal value and a small mortgage may qualify for more funds. They also do not have up-front or monthly premiums. For this reason, lenders may charge a higher interest rate or lend less. Similar to HECMs, a proprietary reverse mortgage has no restrictions for use.
Remember: Privately insured, with higher interest rates and no restrictions.
A single-purpose reverse mortgage can be a great option for those not looking to spend as much in the long run. Single-purpose reverse mortgages are offered by state, local, and nonprofit agencies. As the name suggests, it can only be used for one purpose. And, that purpose is usually specified by the lender.
Like other reverse mortgages, a single-purpose doesn’t have to be repaid until the homeowner passes away or sells. However, keep in mind that if a homeowner fails to maintain insurance, the loan could become due early.
Remember: Cheap, but limited use.
Each type of loan has different characteristics to fit different needs. Shop around with different lenders and make sure to consult with a financial advisor before making your decision. And, don’t forget, always involve a family member in the planning process, if possible.
Originally published March 22, 2022