Single-Purpose Reverse Mortgage

What is 'Single-Purpose Reverse Mortgage'

A financial tool that lets senior homeowners retrieve some of the equity from their homes for a specific, lender-approved reason. Single-purpose reverse mortgages are available through some state and local government agencies and non-profit organizations, but these loans are not widely available and make up a tiny percentage of the reverse mortgage market. Where these loans are available, they are sometimes limited to low- to moderate-income homeowners. They often go by another name, such as property tax deferral programs.

BREAKING DOWN 'Single-Purpose Reverse Mortgage'

The main reason to take out a single-purpose reverse mortgage is to meet a required expense that the homeowner has no other means to pay.

Homeowners can use single-purpose reverse mortgage proceeds only to pay for a specific lender-approved item, such as necessary home repairs 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. A single-purpose reverse mortgage will also become due if the borrower stops maintaining homeowners insurance on the property or if the city condemns the property.

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. While the homeowner doesn’t have to make any payments on a reverse mortgage until it is due, mortgage insurance, fees and interest reduce the amount the homeowner can borrow.

Single-purpose reverse mortgages are not federally insured, but this doesn’t make much difference to borrowing homeowners since the federal mortgage insurance required with the most popular type of reverse mortgage, the home equity conversion mortgage, represents an extra cost for the borrower but primarily benefits the lender. (The insurance premiums cover the lender’s losses if, when the reverse mortgage becomes due, the lender collects less money from the borrowing homeowner or the home sale than it has lent to the homeowner as reverse mortgage proceeds.)

If you’re considering any of the three types of reverse mortgages, make sure to shop around; fees and interest rates can vary significantly by lender and will affect how much you can borrow. Also consider other options, such as home equity loans and home equity lines of credit, as well as state and local housing agency loans for essential home repairs and modifications.