By the end of this post, you'll have a better understanding of which type of reverse mortgage might be right for you or a loved one.
What is a Reverse Mortgage?
A reverse mortgage is a financial product that provides homeowners with an opportunity to access some of their home equity without the need to sell their property or make regular payments.
Unlike a traditional mortgage, in which borrowers make monthly payments to the lender, with a reverse mortgage the lender pays the borrower based on the equity they have in their home; this could be done as a lump sum, monthly installments, or as a line of credit.
The funds received from a reverse mortgage must eventually be repaid when either the homeowner passes away, sells their property or no longer resides in it as their primary residence.
Reverse mortgages are usually sought by those who are older and have built up significant equity in their house but lack sufficient income or savings.
Home Equity Conversion Mortgage
Home Equity Conversion Mortgages (HECMs) are a type of reverse mortgage that is backed by the U.S. Department of Housing and Urban Development (HUD).
It is designed to help seniors who are 62 years or older to convert the equity in their homes into cash. HECMs are the most common type of reverse mortgage.
Who qualifies for HECM
To be eligible for a HECM, the homeowner must be at least 62 years old, have substantial equity in their home, and either own the property outright or have a mortgage balance that is low enough to be paid off at the closing with proceeds from the reverse mortgage loan.
How HECM works
A Home Equity Conversion Mortgage (HECM) allows homeowners to withdraw money from the equity of their homes without having to make any regular payments.
The HECM loan can be received as a single, upfront lump sum payment, in fixed monthly payments over a predetermined period of time, or as a line of credit so the homeowner can borrow regularly when needed.
Even after taking out a HECM, the homeowner retains ownership of the home and can continue living there as long as they adhere to all provisions of the loan requirements.
The amount that can be borrowed through a HECM is determined by several factors such as the current value of the home, the borrower's age at the time of origination and prevailing interest rates.
It's important for potential HECM borrowers to understand how these factors might influence their eligibility for a reverse mortgage and how much money they may be able to receive.
Benefits of HECM
A Home Equity Conversion Mortgage (HECM) provides numerous benefits for retirees and those on fixed incomes.
One of the main advantages is that homeowners gain access to the equity in their homes without financing new monthly payments or having to sell the property.
HECMs also offer a variety of flexible repayment options, so borrowers are not required to repay the loan until they decide to sell the home or after they pass away.
The added assurance of this long-term security is further protected by the Federal Government, who insures HECM loans. This provides an additional layer of security for borrowers when taking out a reverse mortgage.
Drawbacks of HECM
A Home Equity Conversion Mortgage (HECM) can come with a hefty expense since it often has higher interest rates than traditional mortgages, and may also incur various fees and closing costs.
Moreover, the amount available to borrow is based on the value of the property, so in a situation where the home's value decreases, the borrower may get less money than they had initially expected.
Additionally, borrowers must consistently pay taxes, insurance, and regular maintenance fees on their home - all of which can be difficult for senior citizens living off of a fixed income.
Proprietary Reverse Mortgage
A proprietary reverse mortgage is a type of reverse mortgage that is not guaranteed by the government and is offered by private lenders.
It is an all-encompassing term for non-HECM reverse mortgages that are not regulated by the Federal Housing Administration (FHA) or the U.S. Department of Housing and Urban Development (HUD).
Who Qualifies for Proprietary Reverse Mortgage
Proprietary reverse mortgages are best used by borrowers who do not qualify for HECMs. The underwriting process for proprietary reverse mortgages is likely to be similar to HECMs, but there is no counseling requirement.
They are most commonly used by borrowers whose residence value is far higher than the HECM loan limit. The private lender can exceed that limit, allowing the borrower to turn more equity into cash.
How Proprietary Reverse Mortgage Works
A proprietary reverse mortgage works similarly to a HECM.
The lender will underwrite the loan to ensure that the borrower qualifies based on the lender's requirements, and that they are willing and able to keep up with property taxes, maintenance costs, and other expenses related to the property.
No payments are due on the loan until the property is sold, either by the original borrower or by their estate after death. Borrowers who get a proprietary reverse mortgage line of credit only accrue interest on the outstanding balance.
Benefits of Proprietary Reverse Mortgage
The main benefit of a proprietary reverse mortgage is that it allows homeowners to access more funds than they would be able to with a traditional reverse mortgage. This can be especially beneficial for those who have higher home values or need larger amounts of money.
Additionally, proprietary reverse mortgages may offer higher returns than other types of reverse mortgages due to their lack of federal insurance.
Another benefit of a proprietary reverse mortgage is its flexibility when it comes to repayment options. Unlike other types of reverse mortgages, these loans allow borrowers to choose from different repayment plans such as lump sum payments or monthly payments over time.
This can make it easier for borrowers to find an option that works best for their individual needs and financial situation.
Overall, a Proprietary Reverse Mortgage can be an attractive option for seniors looking to access more funds from their home's equity while also enjoying the potential for higher returns and flexible repayment options.
Drawbacks of Proprietary Reverse Mortgage
The main drawback of a proprietary reverse mortgage is the cost. Proprietary reverse mortgages are likely to have even higher fees and interest rates than HECMs.
This is because the mortgage will likely be mostly similar to a HECM, but without the benefit of government insurance, so the lender needs to be compensated for the additional risk.
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is a type of reverse mortgage that is offered by local governments or nonprofits to be used for a specific purpose, such as home repairs or unpaid property taxes.
It is not guaranteed by the federal government and is typically less expensive than other types of reverse mortgages.
Who Qualifies for Single-Purpose Reverse Mortgage
The eligibility requirements for a single-purpose reverse mortgage vary depending on the lender, but borrowers typically need to be at least 62 years old and have enough equity in their home to cover the loan amount.
How Single-Purpose Reverse Mortgage Works
With a single-purpose reverse mortgage, the borrower receives a lump sum of money that must be used for a specific purpose, such as home repairs or unpaid property taxes.
The borrower does not need to use much equity in their residence, and the lender will likely use a title company to enforce the use of proceeds.
It is possible that the lender will require that single-purpose reverse mortgage payments go directly to the payee.
Benefits of Single-Purpose Reverse Mortgage
The main benefit of a single-purpose reverse mortgage is that payments are made directly to the borrower as long as they remain living in their home. This differs from traditional loans where payments are made to the lender.
Additionally, this type of loan is typically less expensive than other types of reverse mortgages.
It is beneficial for borrowers who need to pay a one-time expense, as they won't have to pay a lot of fees to access the equity and can access the loan funds without having to use a high-fee unsecured loan product.
Drawbacks of Single-Purpose Reverse Mortgage
One drawback of a single-purpose reverse mortgage is the limited use of funds.
The borrower can only apply the funds to the designated use of proceeds. If something else comes up, they would need to get the loan restructured or originate a new loan.
This type of reverse mortgage is not suitable for borrowers who need ongoing access to funds or want to rebuild their retirement assets.
Frequently Asked Question
Next we’ll cover our readers' most asked questions about reverse mortgages.
What is the most popular type of reverse mortgage?
The most popular type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM), which is insured by the U.S. Federal Government through the Department of Housing and Urban Development (HUD).
HECMs allow borrowers to access a portion of their home's equity as cash income, without having to make monthly payments on the loan.
Borrowers can receive their funds in one lump sum, as a line of credit, or as monthly payments for as long as they live in their home.
How long do I have to live in my home when taking out a reverse mortgage?
The answer is that there is no set time requirement for living in your home after taking out a reverse mortgage.
However, it's important to note that if you move out of your home for more than 12 consecutive months, the loan will become due and payable. This means that you or your heirs will need to repay the loan balance or sell the home in order to satisfy the debt.
It's also important to note that while there is no set time requirement for living in your home after taking out a reverse mortgage, you must still continue to maintain the property and pay taxes and insurance as required by law.
Failure to do so can result in foreclosure proceedings being initiated against you or your heirs.
What are the eligibility requirements?
In order to qualify for a reverse mortgage, you must be at least 62 years old and own a significant amount of equity in your home. Additionally, the home must be your primary residence and all borrowers on the title must also meet this age requirement.
You will also need to provide proof of income, assets, monthly living expenses and credit history in order to be approved for a reverse mortgage loan.
It is important to note that not everyone will qualify for a reverse mortgage loan. The amount of funds you can receive from a Home Equity Conversion Mortgage (HECM) depends on your age, current interest rates and the value of your home.
It is also important to understand how the HECM program works before applying for one.
Need Help Getting a Reverse Mortgage?
In conclusion, reverse mortgages can be a valuable financial tool for seniors looking to supplement their retirement income, pay off debt, or cover unexpected expenses.
However, they are not right for everyone, and it's important to understand the different types of reverse mortgages available, their benefits, and drawbacks before deciding if they're right for you.
If you're considering a reverse mortgage or have questions about whether it's a good option for you, we encourage you to reach out to the experts at MakeFloridaYourHome.
Our team has years of experience working with seniors in Florida and can help you navigate the complex world of reverse mortgages to find the best option for your specific needs.
Don't hesitate to contact us today to schedule a consultation or to learn more about our services. We look forward to helping you make informed financial decisions and enjoy a comfortable retirement.