Reverse mortgages are unique financial products that allow homeowners, typically seniors, to access their home’s equity without having to sell or move out of the property. Instead of making monthly mortgage payments, the homeowner receives payments from the lender, either in a lump sum, through a line of credit, or in monthly installments. The loan is repaid when the homeowner moves out of the home, sells it, or passes away. However, it is important to note that there are different types of reverse mortgages available, each designed for specific situations. Below are the primary types of reverse mortgages:

1. Home Equity Conversion Mortgage (HECM)

The most common and widely recognized type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). This government-backed loan is insured by the Federal Housing Administration (FHA) and is available through approved lenders. HECMs are designed specifically for seniors aged 62 or older who have substantial equity in their home.

Key Features:

• Eligibility: Homeowners must be 62 years or older, live in the home as their primary residence, and have sufficient home equity. Applicants must also be able to prove their ability to pay for ongoing property taxes, homeowners insurance, and maintenance costs.
• Loan Amount: The amount you can borrow depends on several factors including the value of your home, your age, interest rates, and the location of your property. Typically, the older you are and the more equity you have, the more you can borrow.
• Payment Options: HECM loans offer various disbursement options such as lump sums, monthly payments, or a line of credit, providing flexibility for borrowers to choose how they want to access the funds.
• Repayment: The loan is repaid when the homeowner sells the property, moves out, or passes away. If the homeowner moves into long-term care or is no longer able to live in the home, the loan becomes due.

HECMs are the most common type of reverse mortgage and are typically the preferred choice for many seniors because of the backing by the FHA and the additional consumer protections it provides.

2. Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loans that are not insured by the FHA. These loans are offered by private lenders and are typically suited for homeowners with higher-value homes. Since these loans are not subject to the limits imposed by the FHA, they may allow borrowers to access a larger amount of their home’s equity, especially in cases where the home is valued above the FHA lending limits for HECMs.

Key Features:

• Eligibility: Borrowers must meet the age requirement (62 years or older), and the home must be their primary residence. In addition to this, homeowners should have substantial equity in their home.
• Loan Amount: The loan amount is generally higher than what is available through an HECM. Proprietary reverse mortgages can be ideal for homeowners whose property value exceeds the FHA limits.
• Payment Options: Similar to HECMs, proprietary reverse mortgages may offer flexible disbursement options, such as lump sum payments, monthly payments, or lines of credit. However, these loans tend to have fewer restrictions on how the funds are used.
• Repayment: Like HECMs, proprietary reverse mortgages are repaid when the borrower moves out of the home, sells the property, or passes away.

Proprietary reverse mortgages can be an attractive option for homeowners with high-value properties who want to tap into more of their home equity than what is available through the HECM program. However, they come with the drawback of higher costs and fees, which can make them less appealing to some borrowers.

3. Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages are typically offered by state or local government agencies and nonprofit organizations. These loans are used for specific purposes, such as paying for home repairs or property taxes. They are often the least expensive type of reverse mortgage, but the borrowing restrictions limit their flexibility.

Key Features:

• Eligibility: Single-purpose reverse mortgages are available to seniors aged 62 or older, and borrowers must meet income and credit qualifications. However, the eligibility criteria and program availability can vary by state and local agencies.
• Loan Amount: The loan amount is generally smaller than what is available with HECMs or proprietary reverse mortgages, and the funds are typically restricted to a specific use, such as home improvements or paying property taxes.
• Payment Options: These loans often offer lump sum disbursements, but some programs may provide monthly installments or lines of credit for specific purposes, such as home repairs or property taxes.
• Repayment: As with other types of reverse mortgages, the loan is repaid when the homeowner sells the property, moves out, or passes away. Since these loans are meant for specific purposes, they often come with fewer costs and fees compared to other reverse mortgage products.

Single-purpose reverse mortgages are typically the least expensive and simplest form of reverse mortgage, but their limitations in terms of use and loan size make them less flexible than other options.

1. Reverse Mortgage for Purchase (HECM for Purchase – HECM for Purchase)

This is a specialized variation of the Home Equity Conversion Mortgage (HECM) program, designed for seniors who want to purchase a new primary residence using the proceeds from their reverse mortgage. A Reverse Mortgage for Purchase (HECM for Purchase, or HECM for Purchase) allows homeowners to use their home equity to purchase a new home, typically with no monthly mortgage payments.

Key Features:

• Eligibility: As with other reverse mortgage products, the borrower must be 62 years or older and must use the home as their primary residence. The home purchased using a HECM for Purchase must meet FHA property standards.
• Loan Amount: The loan amount will depend on the homeowner’s age, the value of the new home, and interest rates. Homeowners can typically borrow up to a percentage of the home’s appraised value.
• Payment Options: Since this is a reverse mortgage product, borrowers will not have to make monthly payments. The loan is repaid when the homeowner sells the home, moves out, or passes away.
• Repayment: The loan is repaid when the homeowner sells the property, moves out, or passes away, similar to a traditional reverse mortgage.

HECM for Purchase offers an excellent opportunity for seniors to downsize or relocate to a new home while utilizing the equity they’ve built in their current property.

Conclusion

There are several types of reverse mortgages, each offering different features, eligibility requirements, and benefits. The most commonly used reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is government-backed and offers several options for how the funds can be received. Proprietary reverse mortgages cater to those with higher-value homes, offering larger loans. Single-purpose reverse mortgages are the least expensive but most restrictive, and the HECM for Purchase option allows seniors to purchase a new home using a reverse mortgage. Understanding these different types of reverse mortgages is crucial for seniors seeking to make the best financial decision for their unique circumstances.