What are the Different Types of Reverse Mortgages?
While the FHA is the single largest insurer of reverse mortgages, making most such loans issued today FHA-backed HECM loans, there are non-FHA backed reverse mortgages available. In fact, there are several types of reverse mortgage on the market at the time of this writing. However, they are not all created equal, and you will find that some do not fit your needs.
HECM Reverse Mortgage
This is the most common type of reverse mortgage today. It is backed by the FHA and is part of the organization’s Home Equity Conversion Mortgage program. This type of loan is designed to provide you with access to the equity in your home for whatever use you might have in mind for those funds but comes with strict stipulations and requirements in terms of borrower age, home value, and more.
The maximum home value with a HECM reverse mortgage is $679,650 at the time of this writing, meaning that if your home is worth more than this, it is not eligible for a HECM reverse mortgage. Instead, you will need to work with a private lender offering a proprietary reverse mortgage.
HECM for Purchase
While most reverse mortgages are not designed to help you buy a new home, the FHA realizes that some homeowners lack the financial liquidity to downsize to a new home that fits their needs. Rather than forcing you to remain in a home that is too large, too inefficient, or located in an area that does not support your quality of life, a HECM for purchase loan allows you to exit your current home and buy a new one without going through the traditional home-selling and buying process.
A HECM for purchase allows you to roll both the reverse mortgage and the home loan for purchase into a single transaction. It is particularly popular with seniors seeking a smaller home closer to family, or to move into a home that is better suited for limited mobility needs and comes equipped with things like handrails, rather than retrofitting their existing home.
However, this type of mortgage comes with very high down payment requirements, meaning that it is not a viable solution for all seniors.
Single Purpose Reverse Mortgages
In most instances, reverse mortgages have no stipulations on what you use the funds for. However, that is not the case with the single-purpose reverse mortgage. The name itself spells out what these types of loans are used for – achieving a single, stated purpose with your property.
Because these loans are used for a single purpose, such as renovating a home or paying past due property taxes, they are very affordable. Only a very small amount of money is loaned, based on a fraction of equity in the home, meaning they are very cost effective.
Note that these types of loans are not available through conventional lenders, even those who offer FHA-backed reverse mortgages. In order to apply for and secure a single-purpose reverse mortgage, you will need to determine if your local or state agencies offer this type of funding. Some nonprofit organizations also offer these loans.
Proprietary Reverse Mortgages
If you are looking for a reverse mortgage that is not backed by the federal government, you will need to find a lender offering what are called “proprietary reverse mortgages”. The most common reason to go this route, rather than applying for a HECM, is because your home is valued at more than the FHA’s stated maximum value. These are also sometimes called jumbo reverse mortgages.
Because these loans are not insured by the FHA, there are some significant differences between them and HECM reverse mortgages. For instance, there is no requirement to pay a mortgage insurance premium (MIP), although the lender may require private mortgage insurance (PMI) in some situations. Note that this is far less common than in the world of conventional home loans, where PMI is required if you do not have at least 20% of the home’s value as a down payment.
Another difference here is that you have fewer disbursement options when it comes to how you receive your payments. The only option is a lump sum delivered at the time of closing. You will find that the fees associated with proprietary reverse mortgages are sometimes lower than with HECM reverse mortgages, but the interest rates are often higher due to the lack of government backing and the greater risk assumed by the lender.
Which Type of Reverse Mortgage Is Right for You?
In most instances, a standard HECM reverse mortgage will be the right fit for your needs. However, that is not true in all situations.
If you do not want to borrow a lot of money, but need to make repairs to the home, a single-purpose reverse mortgage might be best. However, the FHA does not offer these, nor do most lenders. Local and state agencies and nonprofit organizations focused on the needs of America’s seniors are the best sources.
If your home is valued at more than the FHA’s current maximum value, then you will not be able to use the HECM program. Instead, you will need to work with a private lender offering a proprietary reverse mortgage. There are numerous such programs available through thousands of lenders across the US but realize that because these loans are not backed by the federal government, they may come with higher interest rates.
If you want to move but use the equity in your current home to fund the purchase, a HECM to purchase loan will be the right fit.
If you have an existing mortgage that has been paid down considerably and want to pay the entire thing off, a standard HECM reverse mortgage might be the best path for you.
If you have an existing HECM mortgage, or even a non-FHA loan, and want to refinance, then a HECM refinance loan will be the better fit for you (we’ll discuss HECM refinance mortgages in a separate article).
With all of this being said, reverse mortgages are not the right fit for everyone. It is important that you understand all of your options, as well as how each of those options will affect your unique personal financial situation. A trusted financial advisor can provide you with this guidance and advice.