If you’ve ever seen an advertisement for reverse mortgages, odds are it involved a home-equity conversion mortgage (HECM). These federally insured loan products allow homeowners who are at least 62 years old to convert home equity into cash to pay for things such as basic living expenses, healthcare costs or a home remodel. While HECMs represent the bulk of the reverse-mortgage market, a small segment – less than 10% – includes two other types: single-purpose reverse mortgages and proprietary reverse mortgages. This article focuses on why someone might benefit from getting a single-purpose reverse mortgage instead of the usual HECM.
What Is a Single-Purpose Reverse Mortgage?
Also known as property-tax deferral programs and deferred payment loans, single-purpose reverse mortgages allow homeowners to access part of their home’s equity to pay for a lender-approved expense – typically property taxes and necessary home repairs. They provide a one-time lump-sum advance.
As with standard HECMs, single-purpose reverse mortgages are not installment loans that you repay through monthly payments. Instead, the entire loan becomes due when you sell the home, move to another primary residence (including an assisted-living facility) or die. Repayment may also be triggered if you stop paying homeowner’s insurance or if the home falls into disrepair and/or is condemned by the city. (For more, see Reverse Mortgage Pitfalls.)
Why Get One?
In general, single-purpose reverse mortgages are made available to moderate-to-low-income homeowners who need help paying for smaller, but crucial expenses such as property taxes and home repairs. In many cases the homeowner may have no other means of covering these expenses, so the single-purpose reverse mortgage can serve an important role in the homeowner’s financial well-being.
It’s important to note that these loan products are issued for a specific purpose – such as paying property taxes. Unlike traditional HECMs, homeowners can’t use single-purpose reverse mortgages to pay for, say, living expenses, medical bills or a vacation. The funds are always used for a specific, lender-approved reason.
Single-purpose reverse mortgages tend to be less expensive than other loan products, which is great news if you’re cash-strapped to begin with. One reason for this is that only a small amount of the home equity is tapped, which makes the loan less risky to the lender.
These loans generally have no origination fees, no insurance premiums, minimal closing costs (if any) and very low interest. In many cases interest is charged on a fixed basis, so the rate will never go up. Another perk: The interest may be “simple” rather than “compound” interest, which means you won’t pay interest on interest.
Researching Your Options
While it’s easy to get a standard HECM, it can be a challenge to find a single-purpose reverse mortgage. That’s because they’re not available everywhere and go by a variety of names. Still, many state and local governments – as well as nonprofit organizations and credit unions – offer some type of single-purpose reverse mortgage to help you pay for home repairs and property taxes.
The Federal Trade Commission’s Consumer Information website recommends contacting staff at your local Area Agency on Aging to find out about programs that may be available in your area. Visit eldercare.gov (or call 1-800-677-1116) to find the nearest Agency on Aging and be sure to ask about “loan or grant programs for home repairs and improvements,” “deferred payment loans” or “property tax deferral programs.”
If you need help with property taxes (not home repairs), you may also find information about available programs by contacting the local government to which you pay them. It should be able to tell you if there are programs in your area and provide details about how the program works and what you would need to do to qualify.
If you are unable to find a single-purpose reverse mortgage in your area, you may want to consider a home-equity loan or a home equity line of credit (HELOC). Problem is, you must meet minimum credit scores and debt-to-income standards, which can be difficult if you’re retired and on a fixed income. Also, one of the biggest perks to the single-purpose reverse mortgage is that there are no monthly loan payments. If you take out a home-equity loan or HELOC instead,that won't be the case. (For more, see Reverse Mortgage or Home-Equity Loan?)
The Bottom Line
If you’re an older homeowner who needs help paying for property taxes or necessary home repairs, a single-purpose reverse mortgage may be a good option. As these loans aren’t available everywhere – and they go by different names – they can be difficult to track down. Still, it can be worth the effort: Single-purpose reverse mortgages typically are a very low-cost option and, in most cases, no repayment is required as long as you live in your home.
Additional Reading or You May Also Like (Choose One)
Complete Guide to Reverse Mortgage
Comparing Reverse Mortgages vs. Forward Mortgages
A Guide to Taxes and Reverse Mortgages
How to Choose a Reverse Mortgage Payment Plan
Reverse Mortgage or Home-Equity Loan?
5 Top Alternatives to a Reverse Mortgage
5 Signs a Reverse Mortgage Is a Good Idea
5 Signs a Reverse Mortgage Is a Bad Idea
How to Avoid Outliving Your Reverse Mortgage
A look at Regulation of Reverse Mortgages
Rules For Obtaining an FHA Reverse Mortgage
Find the Right Reverse Mortgage Counseling Agency
Find The Top Reverse Mortgage Companies
Picking The Right Reverse Mortgage Lender
Reverse Mortgage: Could Your Widow(er) Lose the House?
Beware of These Reverse Mortgage Scams
Reverse Mortgage Pitfalls
Do You Qualify for a Reverse Mortgage?
Reverse Mortgage Types
Who Needs a Proprietary Reverse Mortgage?