A reverse mortgage is a type of loan where you borrow money against the equity in your house. Most of these loans are government-insured, but private companies also offer alternatives for borrowers who may not qualify for one of several reasons.
- There are three types of reverse mortgages
- HECM has six different payment plans that fit different financial situations
Lenders offer many options for the structure of the loan and the payment of funds. Which is best for you depends on your individual situation. It’s important for you to meet with a financial counselor and determine which program is best for you.
3 Types of Reverse Mortgage Loans
The three types of reverse mortgages are single-purpose, proprietary, and home equity conversion. The last is the most common, but each has its own function. Which one is right for you depends on your situation.1
If you need money for a specific project, then a single-purpose loan may be the best option. Some nonprofits and government agencies offer these so that seniors can make repairs, make improvements, or pay their property taxes.
- You must use the money for the specific purpose that the contract specifies.
- These loans often cost less than other options.
- They are hard to find and qualify for.
If there is a specific need that you need to address with your home, you should reach out to local charities and government agencies to see what options are available in your area. A good place to start looking is an Area Agency on Aging.
Private companies offer proprietary reverse mortgages, so they don’t have the same restrictions or guarantees as government-insured loans. They may make a larger loan if your house’s value is high.
- They usually have higher fees, and they get higher as you borrow more.
- Shop around because terms can vary greatly.
Private lenders probably won’t require you to see a counselor, but you should get a third party to review the loan terms with you anyway. Sometimes the costs and benefits can be confusing, and a neutral party may give you an objective look at your options.
Home Equity Conversion Mortgage
Home Equity Conversion Mortgages (HECM) are backed by the Department of Housing and Urban Development (HUD). You can use these for any purpose, but they often have stricter requirements. To qualify you must:
- Be at least 62 years old
- Take out the loan only on your principal residence
- Live in a single-family house, HUD-approved condominium, FHA-approved manufactured home or a two-, three-, or four-unit building where you live in one unit
- Have no balance on your mortgage, or have a balance that is low enough that you can pay it off with your loan proceeds
- Continue to pay property taxes, insurance, home owner’s association fees
- Continue to maintain and repair the property
- Not be delinquent on any federal debt
- Meet with a HUD-approved financial counselor
HUD bases the loan amount on the age of the youngest borrower, the house’s value, and the current interest rate. The maximum amount you can borrow is $679,650 no matter how much your home is worth.
Reverse Mortgage Without FHA Approval
There are non-FHA-approved reverse mortgages. While most of these loans are HECMs, there are a growing number of private lenders. The most common reasons a person goes to one are:
- To borrow more than the HECM limit
- He/she line a condominium that HUD doesn’t approve
If you find yourself in this situation be careful. There are a lot of scams. Also, the terms can be confusing. Have a financial counselor review the contract with you before you sign, so that you understand all the details of the loan.
Can You Get a Lump Sum From a Reverse Mortgage?
You can get a lump sum from a reverse mortgage, and there are other payment options, too. HECMs have six different payment plans.2
In this plan, you get a one-time payment when your loan closes. Interest accrues until the loan comes due.
- It is good for paying off a primary mortgage or paying a large, one-time bill.
- You don’t get any additional funds in the future.
- The interest rate never changes.
With these loans, you can only borrow 60% of your home’s equity. This is a low limit compared to other options.
There are five options for adjustable-rate HECMs. The interest rates on these loans adjust either monthly or annually. Each option affects how your interest accrues over time, but your choice won’t affect your monthly payments or available credit. The available payment plans include:
- Tenure – Equal monthly payments based on a 100-year lifetime assumption. It’s good if you want a steady monthly check for the rest of your life.
- Term – Equal monthly payments for a set period that you choose. It’s good if you need money for a short period of time.
- Line of Credit – Access money as you need it. This gives you more control over when you use the funds and how much of the available balance you take out.
- Modified tenure – fixed monthly payments with a line of credit. It gives you a baseline monthly payment with the option of taking a little more out if you have an unexpected expense.
- Modified Term – Fixed monthly payments for a specified period with a line of credit. At the end of the term, you have access to the funds that you haven’t used yet.
It’s important to think about which option works best for you. HUD offers so many options because seniors have different needs. Find the best option that feeds your individual needs.
Final Thoughts on What Type of Loan is a Reverse Mortgage
A reverse mortgage is the type of loan that extracts equity from your home and gives it back to you. It’s important to remember that it creates a debt for you that you or your estate must pay back at some point.
There are three types of loans, but the only one that is insured by the federal government is the HECM. While the requirements are more stringent for these, we recommend them because the government insures them. If you decide that you need a reverse mortgage, HECMs offer a payment plan that will surely fit your needs.
Finally, you should always meet with a financial counselor. Most private lenders won’t require this, but HUD will for a HECM. Take the meeting seriously, because the terms can be complicated and confusing.