What Is a Reverse Mortgage?
Reverse mortgage are financial products that have been around in the United States since a Maine-based bank released the first reverse mortgage in 1961. They were put under the purview of the U.S. Department of Housing and Urban Development (HUD) in 1987.
A reverse mortgage is a loan that works a little differently from a traditional mortgage. It allows homeowners who are 62 or older to borrow money by using their homes as security to back the loan. It is often used to pay off current mortgages, help pay healthcare expenses, or supplement current income. Once a reverse mortgage is established, repayment is typically not required until you die, move, or sell your home.
There are three types of reverse mortgage loans available to homeowners: single-purpose, federally insured, and proprietary.
- Reverse mortgages provide individuals ages 62 and older with income in the form of a loan using the equity in their homes.
- The three types of reverse mortgage loans are single-purpose, federally insured, and proprietary.
- Single-purpose reverse mortgages, which are offered by state, local, and nonprofit agencies, are the cheapest and least common form of reverse mortgages.
- Home equity conversion mortgages (HECMs) are federally insured products that are backed by the U.S. Department of Housing and Urban Development (HUD) and are the most common.
- Proprietary reverse mortgages are used by homeowners whose homes are appraised at values exceeding the HUD limit.
Single-Purpose Reverse Mortgages
A single-purpose reverse mortgage is offered by state, local, and nonprofit agencies. It is the least expensive option for a reverse mortgage loan, partly because it’s backed by the government and other nonprofits. As such, homeowners can expect to pay less in interest and fees for a single-purpose reverse mortgage than for a home equity conversion mortgage (HECM) or a proprietary reverse mortgage.
This kind of loan is the least common among the three types and isn’t available in every state. It works a little differently from home equity loans, which can be used for any purpose. Single-purpose reverse mortgage lenders restrict how the proceeds can be used. As the name implies, homeowners can only use them for a single, lender-approved item, such as necessary repairs to the home or property taxes.
While home equity loans or home equity lines of credit (HELOCs) require monthly installment payments, single-purpose reverse mortgages don’t have to be repaid until the home’s ownership changes, the borrower moves to a different primary residence, or the borrower passes away. These loans also become due if borrowers stop maintaining homeowners insurance on the property or if the city condemns the property.
Mortgage insurance, fees, and interest reduce the amount that the homeowner can borrow in a single-purpose reverse mortgage.
Home Equity Conversion Mortgages (HECMs)
Home equity conversion mortgages (HECMs) are federally insured, which means that they are backed by HUD. This type of loan is likely to be more expensive than a traditional home loan and comes with high up-front costs. It is the most widely used reverse mortgage because it carries no income limitations or medical requirements, and the loan can be used for any reason.
Counseling is required before applying. This ensures that the homeowner is fully aware of the costs, payment options, and responsibilities involved. Interested parties are also informed about any nonprofit or government-issued alternatives, as long as they’re eligible. There is a charge for the counseling session, which can be paid from the loan proceeds.
After the counseling session, you find out how much you can borrow with an HECM. Your age, the value of your home, and current interest rates determine how much you can borrow. Those who are older and have higher equity are provided with more money.
Once the loan is established, you can choose among several payment options:
- A term option that allots monthly cash advances for a specific time.
- A tenure option that pays monthly advances for as long as the home is your primary residence.
- A credit line that lets you draw from the account at any time, or a combination of this credit line coupled with monthly payments.
You can change your payment option for a low fee if your situation ever changes.
Proprietary Reverse Mortgages
Rather than being backed by the federal government, proprietary reverse mortgages are backed by private lenders. They benefit homeowners who want more money and whose homes are appraised at higher values. This means that you may qualify for a proprietary reverse mortgage if your property is worth more than the 2022 lending limit of $970,800 for federally backed HECMs.
People whose mortgage balances are low qualify for more funds. Counseling is sometimes required before applying, which can help provide a comparison between the costs and benefits of a proprietary loan and an HECM. Payment works the same way as the HECM option, which means that you can choose a lump sum or a series of monthly payments.
Because proprietary reverse mortgages are not federally insured, they do not have up-front or monthly mortgage insurance premiums (MIPs). This means that you can probably borrow more. Whether this makes it better than an HECM depends on the lender’s interest rate and how much they’re willing to advance based on the home’s value to compensate for the lack of mortgage insurance.
Make sure to investigate both if you’re considering a proprietary reverse mortgage. Compare the interest rates and fees from several proprietary reverse mortgage lenders, and gather quotes from several HECM providers, to see which option gives you the best deal. Your age—and how far above HECM limits your home’s value is—will also influence which one will be the better deal.
Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or HUD.
What happens to my reverse mortgage after I die?
Your reverse mortgage becomes due after your death. Your heirs can either pay it off from their own funds or refinance the home to pay off the reverse mortgage, or the lender will sell the home to pay the balance of the reverse mortgage.
What reverse mortgage option is best for me?
If you need a fixed amount for a specific repair or a tax bill, then a single-purpose reverse mortgage is the cheapest option if you can find one. If you have a high-value property and need more than the $970,800 home equity conversion mortgage (HECM) lending limit, then your only option is a proprietary reverse mortgage. If you don’t meet either of those criteria, then a standard HECM is your best option.
Can a home with a reverse mortgage go into foreclosure?
Yes. A home with a reverse mortgage can be foreclosed on if the homeowner moves out of the property or fails to keep the property in good repair, keep homeowners insurance current on the property, or pay property taxes. Even if a homeowner moves out of the property involuntarily (such as for an extended stay in a care facility), if they are gone for more than a year, then the reverse mortgage becomes due. If the homeowner fails to pay, then the property will be foreclosed on.
The Bottom Line
Reverse mortgages are financial products that are designed to provide homeowners who are age 62 or older with a form of income by using the equity in their homes. They can come in handy when your financial situation changes and your living expenses increase.
Although some perks come with reverse mortgages—notably the fact that they can provide you with regular income without having to pay them back until you die, move, or sell your home—make sure that you do your homework. And explore the alternatives, such as home equity loans and HELOCs, before you commit to anything.
But remember, since your home is likely worth a high value (one reason to go after a proprietary reverse mortgage), you also may want to consider whether downsizing to something smaller would accomplish your goals and leave you with more equity.