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What Are The 3 Types Of Reverse Mortgages?

Ashley Kilroy7-minute read

November 28, 2022

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Many people are familiar with a mortgage – a loan that allows you to purchase a home. But what if you could get a home loan that helps supplement your income and support your other financial goals? A reverse mortgage may be able to do just that by creating a cashflow from the equity in a home. There are three kinds of reverse mortgages and they can assist homeowners who are 62 and older in various ways. They may provide the funds for home improvement projects, pay off the rest of a mortgage and pay for medical care, living needs and more.

Are you wondering, “what are the three types of reverse mortgages and which one’s right for me?” We’re here to help. Read on to learn more about each loan, its pros and cons and when it could be a good option for you.

What Is A Reverse Mortgage?  

A reverse mortgage is a loan that lets you turn your home equity into cash and are available to homeowners age 62 and older. With a traditional mortgage, you pay the bank monthly for your home – but a reverse mortgage allows you to change equity in your home into cash payments from your lender.

Reverse mortgages first pay off the remainder of the mortgage, if necessary, and the rest of the money goes to the borrower. While monthly mortgage payments are no longer required, you must continue paying property taxes, homeowners insurance and home maintenance costs.

These loans require repayment when you move out of the home or pass away. In addition, if you let your home fall into disrepair or get behind on property taxes or homeowners insurance, the reverse mortgage will come due.

There are three types of reverse mortgages: a single-purpose reverse mortgage, proprietary reverse mortgage, and the home equity conversion mortgage (HECM). Each type has its strengths and weaknesses, found below.

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Single-Purpose Reverse Mortgage 

A single-purpose reverse mortgage restricts borrowers’ use of cash for one defined purpose, such as home repairs. To receive this reverse mortgage, your lender must approve the purpose of the distributed funds before giving the loan.

Single-purpose reverse mortgages are rare among conventional lenders. Instead, government entities, nonprofits, and certain credit unions are the main providers of these loans. Therefore, homeowners may have challenges finding an institution to provide one.

Pros

These loans are tax-free and available to homeowners of all income levels. Additionally, a single-purpose reverse mortgage allows you to focus on a specific financial goal because you can’t use the money for any other reason than what you gave your lender. This can ensure the money doesn’t go to waste. Lastly, you don’t have to make payments until it comes due – as long as you keep up with property taxes and homeowners insurance. 

Cons

You might have to pay closing costs for a single-purpose reverse mortgage. Plus, your lender will charge interest on the loan balance until you repay it. While focusing on a single purpose can be a good thing, it can also be limiting. Remember, you can only use the loan money for the purpose your lender certifies. Lenders typically limit the scope of single-purpose mortgages to house-related expenses, such as taxes or renovations. Moreover, these loans may not be available in your state.

When It May Be A Good Option 

A single-purpose reverse mortgage can help you catch up on property taxes or homeowners insurance premiums. However, it’s wise to have a plan to continue paying these expenses after your reverse mortgage helps you catch up. Otherwise, falling behind again will force your reverse mortgage to become due, putting you in deeper financial straits.

On the other hand, if you are financially stable but have an expensive home repair, a single-purpose reverse mortgage is an excellent way to afford it. Since the loan will come due if you sell your home, the repair could raise your property value and pay for itself down the road.

Proprietary Reverse Mortgage

A proprietary reverse mortgage turns home equity into a lump sum payment to the borrower. These reverse mortgages come from private lenders instead of conventional financial institutions or government entities. As a result, they are exempt from Federal Housing Administration (FHA) regulations and government insurance. Because lenders can lend amounts higher than the federal limit, they’re often called jumbo reverse mortgages.  

Pros

As stated, proprietary reverse mortgages surpass the FHA limits of $715,000 – and $970,800 in high-cost areas – so homeowners can receive more than other types of reverse mortgages, if they qualify. For example, if you have a paid-off home worth $1.5 million, you can access more equity through a proprietary reverse mortgage.

In addition, you won’t pay mortgage insurance. And unlike single-purpose reverse mortgages, you can use proprietary reverse mortgages to pay for whatever expenses you like, from medical costs to debt relief.

Cons

With most lenders, you can only receive payment in one lump sum, making money management potentially trickier. You’ll also have a higher interest rate because of the absence of government regulations. Lastly, since the law requires no financial counseling beforehand, a proprietary reverse mortgage may be ill-advised for borrowers who don’t consider their options.

When It May Be A Good Option 

Borrowers benefit most from a proprietary reverse mortgage if their home is worth more than the limit from the FHA. Otherwise, their access to equity above that amount is cut off, even if they have paid off their mortgage. As a result, this loan may be a good idea for borrowers with high-value homes who have considerable expenses to address. 

Home Equity Conversion Mortgage (HECM) 

A home equity conversion mortgage (HECM) is an FHA-insured loan and has the most government protection for borrowers. As a result, HECMs may have less stringent financial requirements and are nonrecourse loans. That means homeowners will never owe more than their home is worth. These features make HECMs the most secure reverse mortgage type available.

Borrowers receive their money in a lump sum, monthly installments, a line of credit or any combination of the three. When the borrower passes away, heirs can repay the reverse mortgage by selling the property. Additionally, heirs can purchase it for the balance owed or 95% of the home’s value (whichever is less) or turn over the home to the lender without owing another penny.

Pros

Borrowers can use funds from a HECM for any goals and projects. Plus, HECM eligibility doesn’t depend on credit score, though they will go through a financial assessment to help ensure success with their loan. Borrowers also benefit from Department of Housing and Urban Development (HUD)-mandated financial counseling, where they learn about HECMs and any alternative options they have so they can make an educated decision.

Borrowers receive further protection because the FHA prevents them from owing more than their home is worth, even if their home value drops after receiving the HECM. In addition, homeowners have more flexibility through fixed- or adjustable-interest rates on their loans. Fixed-rate loans give lump sum payments, while adjustable-rate loans allow borrowers to turn equity into lump sums, monthly distributions, a line of credit or a combination of these. Lastly, when borrowers pass away, their heirs have options to recover the home or sign it over to the lender it at no additional cost.

Cons

HECMs have more fees, including mortgage insurance and HUD-mandated counseling. Also, if a medical challenge or other issue prevents you from living in your home at least 6 months out of the year, you’ll break one of the loan conditions and become responsible for immediate repayment. Also, although HECM funds aren’t taxable income, they might affect your eligibility for Supplemental Security Income (SSI) or Medicaid. It’s best to speak with a financial advisor who can help you make the right decision based on your financial situation.

When It May Be A Good Option 

If you’re having trouble making mortgage payments or wish to supplement your income in retirement, a HECM can repay the remainder of your mortgage and bolster your monthly income. Or, if you want to use your equity in multiple ways – for example, putting several thousand upfront for a home repair and the rest as a line of credit for future or emergency expenses – a HECM can give you the flexibility.

Reverse Mortgage FAQs

Here are three questions you might have after reading about reverse mortgages.

What’s the difference between a regular mortgage and a reverse mortgage?

A mortgage is a loan that allows you to purchase a home. Borrowers pay their lenders monthly to reduce the mortgage balance gradually. Oppositely, a reverse mortgage is a lump sum or series of payments your lender sends you based on the equity of a home.

What is the most commonly used reverse mortgage? 

The most commonly used reverse mortgage is the HECM, which the FHA insures. It contains the most consumer protections of any reverse mortgage type and helps seniors with all different kinds of financial needs.

Which reverse mortgage option is best for me? 

The ideal reverse mortgage depends on your specific financial circumstances. For example, if your home is worth more than the government-mandated limit, a proprietary reverse mortgage may allow you to access more of your equity. On the other hand, if you need financing for a home improvement project or wish to consolidate your debt or build an emergency fund, a home equity conversion mortgage (HECM) is a widely available financial tool. We recommend speaking to a financial professional to provide assistance based on your specific situation and goals.

The Bottom Line

Reverse mortgages can help with a single purpose, pay out lump sums for homes worth over $1 million, and help retirees with many financial needs. While single-purpose and proprietary reverse mortgages are available, the least risky reverse mortgage is the HECM due to government protections. That said, your financial situation will determine the reverse mortgage that fits you best. It’s important to remember, too, that reverse mortgages aren’t for everyone. Make sure you take the time to learn more about these complex loans and any alternative options you may have.

Rocket Mortgage® doesn’t offer reverse mortgages, but may offer an alternative solution, like refinancing or downsizing to a new, smaller home. If you’ve done your research and think either of those could be a better option, start your application online today. 

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Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.