Types of Reverse Mortgages
It is a common misconception that reverse mortgages are best used only as a last resort. Though some other financial products are designed for a single purpose, the truth is that reverse mortgages are not a “one size fits all” loan. Over the years these loans have evolved to provide a variety of options to accommodate a number of borrowers’, age 62 and older, specific wants and needs. Whether you are a senior homeowner interested in a loan that is government-insured, or one who prefers a loan without federal insurance, there is a reverse mortgage loan available to you. If you would like access to a portion of your equity with a loan that accommodates your high-valued home, allows you to refinance your existing reverse mortgage, or combines a reverse mortgage and a new home purchase in a single transaction, you will likely find a match in one of the reverse mortgage loans outlined below. Read on to learn more about the types of reverse mortgages currently available on the market today.
Standard Home Equity Conversion Mortgages (HECM)
The most popular type of reverse mortgage is the federally-insured Home Equity Conversion Mortgage, also known as HECM. Backed by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), HECM reverse mortgage loans allow borrowers to access a portion of their equity based on the borrower’s age as well as the home’s value. Borrowers can qualify to receive a HECM on their home’s value up to $726,525 (updated January 1st, 2019). This loan is available with either an adjustable rate or fixed rate.
- Adjustable Rate – Known for its flexibility, this rate is based on the London Interbank Offer Rate (LIBOR) index and can be disbursed as a lump sum, a line of credit, a monthly payment, or a combination of any of these options. With an adjustable rate loan, the borrower has the option to change the monthly disbursement amount or specify a fixed disbursement amount based on their available funds. Also, when choosing the line of credit option, the available credit can increase and grow according to this interest rate, and will not be canceled or reduced in the way that Home Equity Line of Credit (HELOC) options sometimes can, as long as the loan terms are met. Further, the HECM line of credit can be opened now, available as future needs arise.
- Fixed Rate – This fixed option is helpful in locking in an interest rate when it is low. However, it is available in a lump sum disbursement option only.
HECM for Purchase
The HECM for Purchase is a product designed to help senior homeowners purchase a new home that is better suited to their needs, while obtaining a reverse mortgage in the same transaction. Many seniors have found this option helpful when wanting to purchase a new home that is closer to family, smaller in size, or to accommodate new physical needs related to aging (such as houses containing handrails, ramps, and wider entrances, all on the ground level).
One huge advantage of using this type of reverse mortgage is that a HECM for Purchase only incurs one set of closing costs, rather than two sets of closing costs that occur if a borrower purchased a home and then separately took out a reverse mortgage on it.
Reverse Mortgage Refinance
The refinance option was designed for senior homeowners with a current reverse mortgage already in place. Popular reasons for refinancing include: taking advantage of a lower interest rate that has become available, adding a spouse to the mortgage, or accessing more cash when equity rises due to an increase in the home’s value. Any mortgage can be refinanced, and if you currently have a HECM, it can be refinanced into another HECM, depending on the amount of equity you have remaining in the home.
Single-Purpose Reverse Mortgages
If you have ever wondered about alternatives to reverse mortgage loans that are government-backed, you will be happy to discover that not all these loan types are federally insured. This type of reverse mortgage is offered by some non-profit organizations and some local and state government agencies, and is meant to be used for one specified and approved purpose, such as repairing the home or paying property taxes. Only a small amount of equity is typically used, thus making this type lower in cost. If you are looking for the least expensive option, you will find it with Single-Purpose reverse mortgages. To locate single-purpose reverse mortgage lenders, research your local agencies on aging who should be able to tell you if loan programs for home repairs exist in your local area.
Proprietary Reverse Mortgage
For senior homeowners with high-valued properties hoping to access a greater amount of their equity, the HECM’s federally-set borrowing limit (based on the home’s value up to $726,525) can feel restrictive. To cater to this particular group of homeowners is another type of non-FHA reverse mortgage called the proprietary, or jumbo, reverse mortgage. This loan type is usually backed by the private lending companies and banks that develop these loans. They are not insured by the FHA and therefore do not require an insurance premium, along with some other requirements associated with HECM reverse mortgage regulations. Unlike the HECM, funds from a proprietary reverse mortgage loan are not available in multiple options of disbursement, like a monthly payment or line of credit. All funds are only available in one lump sum at closing. In general, interest rates can be higher than HECMs, but fees can be lower.
If you have decided that a reverse mortgage is the right choice for you, it is helpful to know that you are by no means limited to just one type of loan. You have different options to get the loan type that best fits your needs. For help in determining which type would most benefit you, call American Advisors Group at 1-888-998-3147 and speak with one of our knowledgeable reverse mortgage professionals.