Reverse mortgages come in a variety of forms, each with unique advantages and applications, if you're thinking about using the equity in your home to improve your retirement income.
In this post, we will talk about the different kinds of mortgages, what to consider when selecting one, and more.
With a reverse mortgage, homeowners—typically those who are 62 years of age and older—can access their home's equity without having to sell or relocate. The homeowner can utilize the equity, depending on the type of loan, to pay off debts, cover medical costs, make repairs to the house, and more. It can also be used to supplement retirement income. In a reverse mortgage, the homeowner receives payment from the lender instead of the lender receiving monthly payments from borrowers as in standard mortgages. Reverse mortgages have one special feature: the loan is only paid back when the homeowner no longer resides in the house as their primary residence, which usually happens when they sell it, move out, or pass away.
After learning the ins and outs of reverse mortgages, let's take a closer look at the differences between the different kinds of reverse mortgages.
Home Equity Conversion Mortgage (HECM)
Because HECM is Federal Housing Administration (FHA) insured, it provides the highest level of security for borrowers. One of its main benefits is that, even if the value of the home decreases, borrowers will never repay more than the loan's nonrecourse amount. Another is that, in comparison to other loans, the credit score and other financial conditions for HECM loans are frequently more forgiving. It offers several ways to make payments, such as a line of credit, monthly disbursements, lump sum payments made at fixed or variable rates, or a mix of these. Because of this, HECM loans are flexible and appropriate for a range of purposes, including paying for schooling, paying for medical bills, consolidating debt, and supplemental income. However, these loans have to abide by the FHA's lending limitations, which state that a loan cannot be greater than $1,149,825 (as of 2024).
Proprietary Reverse Mortgage
For those seeking greater freedom and possessing a higher property value, a proprietary reverse mortgage may be the most advantageous choice. Because these loans are supplied by private lenders, they are not covered by FHA requirements or mortgage insurance. Put differently, while lenders may offer amounts above the federal ceiling, they do not provide the same level of security as HECM loans. Proprietary loans also referred to as jumbo reverse mortgages, provide borrowers with flexibility in how they spend their loans. For those who desire more independence and need higher loan limits to meet their particular financial objectives, this is the best choice.
Single Purpose Reverse Mortgage
Single-purpose mortgages, provided by nonprofit organizations or state or local government entities, typically have lower fees than other types of reverse mortgages. They do, however, have certain limitations. For instance, the money cannot be utilized for anything other than the lender's designated uses, such as home maintenance, property taxes, or other necessities. When compared to HECM or bespoke reverse mortgages, this reduces their flexibility. Furthermore, there's a chance that these loans have more stringent qualifying standards, such as residency or income restrictions.
There are a few things to take into account while choosing the kind of reverse mortgage that best meets your needs:
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Caroline Soriano