There are three types of reverse mortgage loans available to homeowners aged 62 and older: single-purpose reverse mortgages, federally-insured reverse mortgages, and proprietary reverse mortgages. A reverse mortgage loan, like a traditional mortgage, is a way for homeowners to borrow money using their home as security for 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 death or if you move or sell your home.
- There are three types of reverse mortgage loans available to homeowners aged 62 and older: single-purpose reverse mortgages, federally-insured reverse mortgages, and proprietary reverse mortgages.
- A single-purpose reverse mortgage is offered by state, local, and nonprofit agencies; it is the least expensive process option for a reverse mortgage loan.
- Home equity conversion mortgages (HECM) are federally-insured reverse mortgages backed by the U.S. Department of Housing and Urban Development.
- A proprietary reverse mortgage is used for a larger advance for a home appraised at a high value.
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is offered by state, local, and nonprofit agencies. It is the least expensive process option for a reverse mortgage loan. The state or local government, or nonprofit agency, specifies the reason for the reverse mortgage. Homeowners can use single-purpose reverse mortgage proceeds only to pay for a specific lender-approved item, such as necessary repairs to the home or property taxes.
Unlike home-equity loan proceeds, which can be used for any purpose, lenders restrict how single-purpose reverse mortgage proceeds can be used. However, while a home equity loan or line of credit requires monthly installment payments, a single-purpose reverse mortgage doesn’t have to be repaid until the home’s ownership changes, the borrower moves to a different primary residence, or the borrower passes away.
Even though a homeowner doesn’t have to make any payments on a reverse mortgage until it is due, mortgage insurance, fees, and interest will reduce the amount the homeowner can borrow.
A single-purpose reverse mortgage will also become due if the borrower stops maintaining homeowner's insurance on the property or if the city condemns the property.
While this option may seem limited, a homeowner can expect to pay less in interest and fees for a single-purpose reverse mortgage than for a home equity conversion mortgage or a proprietary reverse mortgage.
Home Equity Conversion Mortgage
Home equity conversion mortgages (HECM) are federally-insured reverse mortgages backed by the U.S. Department of Housing and Urban Development. An HECM is likely to be more expensive than a traditional home loan, in addition to having high upfront 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 for an HECM so that the homeowner is fully educated on the costs, payment options, and responsibilities involved in the loan. During this counseling session, interested parties are also notified about any nonprofit or government-issued alternatives for which you may be eligible. It is also determined whether or not you should opt for a single-purpose or a proprietary reverse mortgage. You are charged for this counseling session, but the charge can be paid from your 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. It is also important to owe as little as possible on the home to receive the best results.
Once the loan is established, you can choose between several payments, such as 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). If you need to change your payment option, you can do so with a low fee.
Proprietary Reverse Mortgage
A proprietary reverse mortgage is used for a larger advance for a home appraised at a high value. For example, if your property is worth more than $765,600, the 2020 lending limit for federally backed HECMs, you may be eligible for a higher loan if you go the proprietary route.
Those with low mortgages qualify for more funds. Counseling is sometimes required before applying for these loans; a counselor can help compare the costs and benefits of a proprietary loan and an HECM to determine if a proprietary loan is right for you.
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).
Mortgage Insurance Premiums
Because proprietary reverse mortgages are not federally insured, they do not have up-front or monthly mortgage insurance premiums (MIPs). That means you're likely to be able to borrow more. (While the homeowner doesn’t have to pay anything on a home equity conversion mortgage until it is due, the monthly premiums reduce the amount the homeowner can borrow.)
So is a proprietary reverse mortgage a better deal than an HECM? That depends: Lenders may charge higher interest rates and lend less, relative to the home’s value, to make up for the lack of mortgage insurance.
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.
Also, consider alternatives like home-equity loans and lines of credit. And since your home is likely worth a high value (one reason to go after a proprietary mortgage), you may also want to consider whether downsizing to something smaller would accomplish your goals and leave you with more equity.