Your Guide to Understanding the Different Types of Reverse Mortgages
Reverse mortgages were first offered in the USA starting in the 1960s. It’s a loan that works much differently than home equity loans, balloon mortgages, and even fixed-rate mortgages. The loans are designed for older homeowners to be able to borrow money to pay off medical debt, their mortgages, and other forms of debt. And unlike a normal loan, reverse mortgages do not have monthly payments that are required. This means that it doesn’t increase the financial burden for people 62 and older. Here’s a quick guide to help you understand the three different types of reverse mortgages that are available for people 62+ that own their homes.
How Reverse Mortgages Work
Unlike a regular home equity loan that you repay in instalments each month, a reverse mortgage leverages the equity in the home, but the loan doesn’t become due right away. In fact, unless the owner of the property dies, switches ownership of the house, or the property becomes uninhabitable, the reverse mortgage does not need to be repaid. This is much different from traditional lending. This is why it’s only available to people aged 62+. Looking through the Reverse Mortgage options can help you determine which one suits your particular needs the most. Here are the 3 different types and some basic information about each of them:
Consider HECMs (Home Equity Conversion Mortgages)
When you want a reverse mortgage, most people opt for the home equity conversion mortgage option. They offer the most flexibility, are available in every state, and are insured by the federal government. The FHA insures these loans in much the same way that normal FHA mortgages are backed. This allows more people the opportunity to take advantage of this lending option after they turn 62.
If you want to consider this option, you’ll need to undergo counseling that educates the homeowner on all of their responsibilities as it pertains to the loan, payment options, and even the full cost after all is said and done. They will even educate you on how to get out of a reverse mortgage, if needed. Once you go through counseling, then you’ll be able to get more information about the amount you can borrow, and the next steps for you.
The nice thing about HECMs is that you can choose from a line of credit that you can draw from while you own your home, a term option that offers cash advances for a certain number of months, and even an option that allows for those monthly advances for the entire time you own the home.
Investigate Government-Backed Reverse Mortgages
One of the options for a reverse mortgage is to get one that is backed by government and non-profit organizations. These government-backed ones are also called single-purpose reverse mortgages. This means that they can only be used for a limited number of purposes. They incur less interest than the other types of reverse mortgages, however, they are the least common because of the limited ways they can be used. Homeowners can expect to use them for things like paying property taxes and even for making repairs, like the roof or the foundation is failing.
When looking at this type of reverse mortgage, understand that not every state offers them. Additionally, because they are not available everywhere, it also impacts how common they are.
Learn About Private Lender Backed Reverse Mortgages
On the flip side, reverse mortgages are loans backed by private lenders. These are also called proprietary reverse mortgages. When you have a home worth a lot of money, these types of reverse mortgages are often your best option. This is also much more flexible in terms of what you can use the money for and how the money gets disbursed to the homeowner.
People can opt for a one-time large lump sum payment or monthly payments. Some prefer the monthly ones if they are trying to pay bills each month versus the one-time payment, while others want to use the one-time option to pay off debt and medical bills more quickly. Something to note about this option is that they do not have monthly payments that need to be made which often allows borrowers to take out more money in the loan.
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