If you’ve ever seen an advertisement for reverse mortgages, the odds are that 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 includes two other types: single-purpose reverse mortgages and proprietary reverse mortgages. In some situations a single-purpose reverse mortgage is more beneficial than a HECM.
- A reverse mortgage is a type of loan for people aged 62 and older that allows homeowners to convert some of their home equity into cash income.
- In a single-use reverse mortgage, borrowers must use these payments for a specific purpose approved by the lender.
- In particular, these lump-sum advances can be used to pay for property taxes, maintenance, and upkeep of the home.
- Costs associated with single-purpose reverse mortgages tend to be lower than similar options, but it may also be harder to find a lender offering them.
What Is a Single-Purpose Reverse Mortgage?
Single-purpose reverse mortgages allow homeowners who are 62 years and older 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. Most single-purpose reverse mortgages are issued by state and local government agencies and non-profit organizations.
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.
Why Get a Single-Purpose Reverse Mortgage?
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.
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.
Because of their limited scope that focuses on the home itself, borrowers typically find these easier to obtain and at lower interest rates than other types of reverse mortgages. On the other hand, borrowers may find it challenging to locate lenders who offer these types of loans.
Costs for a Single-Purpose Reverse Mortgage
As mentioned, single-purpose reverse mortgages tend to be less expensive than other similar 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 come with no origination fees, no insurance premiums, minimal closing costs (if any), and relatively low interest. In many cases interest is charged at a fixed rate, so the rates will never go up. Another perk is that the interest on the loan will often be simple rather than compound interest, which means you will not pay interest on interest, making for lower total payments over the life of the loan.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Researching Your Options
While it is often 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. 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 advice 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, 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(s) work(s) 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). But 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.
Are Single-Purpose Reverse Mortgages Riskier?
All loan products carry risk, but single-purpose reverse mortgages generally have lower fees, more favorable terms and interest rates, so they can be less risky than more traditional HECM mortgages.
Who Is a Single-Purpose Reverse Mortgage Ideal For?
A single-purpose reverse mortgage can be ideal for someone who needs a set amount of money for a specific purpose (for example, property taxes, roof repairs, and so on) who cannot get approved for other programs or other loan products. Potential borrowers should contact the aging services administration in their area to see if they qualify for property tax abatement or home repair services before signing up for a single-purpose reverse mortgage.
Who Should Not Get a Single-Purpose Reverse Mortgage?
Those with the cash to cover what they need—or who want to leave their home free and clear to their heirs—should not get a single-purpose reverse mortgage.
What Happens to a Single-Purpose Reverse Mortgage When I Die?
Whoever inherits your home would be responsible for paying off the single-purpose reverse mortgage after your passing. The most common way they do this is by using their own funds or applying for a loan product in their own name, such as a HELOC or mortgage that would pay off the single-purpose reverse mortgage.
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, 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.