Reverse Mortgages and Their Differences

By Susan M. Keenan

What is a reverse mortgage?

Three basic types of reverse mortgages exist. Not all of them are available everywhere. Different costs are associated with each. Which type should you get?

Let’s start with the basic definition of a reverse mortgage. A reverse mortgage is a loan that permits the homeowner to use the equity that they have built up to borrow money now, but to repay it later.

It is a loan in which the individual does not make monthly payments and does not have to pay it back until certain conditions occur. Specifically, the loan is not due until the homeowner dies, sells the home, or the home is no longer used as the primary residence.

Who takes out a reverse mortgage?

Older homeowners who are looking for an additional source of income may consider taking out a reverse mortgage. They might need to supplement their social security or pension, pay for medical expenses, or finance repairs to the family home. A reverse mortgage can be the difference between remaining in the home and selling it.

To qualify for a reverse mortgage, individuals must be 62 years of age or older. In addition, they must live in the home that is being used for its equity.

What are the three types of reverse mortgages?

Single purpose mortgages, available in limited areas, are offered by governmental agencies, both local and state, and some non-profit agencies. Besides the initial drawback of not being freely available, this type of loan may only be used for one purpose as the name indicates. Examples of acceptable purposes are payment of property taxes, home repairs, or home improvements. Additionally, only individuals with low or very moderate incomes can qualify for this type of reverse mortgage. On the upside, very low costs are associated with this type of mortgage.

Home Equity Conversion Mortgages, HECMs, are federally insured and the U.S. Department of Housing and Urban Development backs them up. HECMs, widely available, have no restrictions. Additionally, this loan may be used for any purpose whatsoever. Therefore, individuals with any income level and medical background can acquire one. The downside of this type of loan is that it generally has higher start up costs that make it unwise to get this type of loan if you are not planning to remain in the home for a relatively long time.

Proprietary reverse mortgages, backed by the companies that create them, are private loans. Like HECMs, this type of loan generally has higher start up costs associated with it. Additionally, a proprietary reverse mortgage might have greater payoff costs as well.

How much money can be borrowed?

Obviously, a limit exists to the amount of money that may be borrowed. How much money can be borrowed depends on several things. The age of the homeowner applying for the mortgage, the amount of equity built up in the home, the home’s appraised value, the area in which the home is located, and interests rates, all of these play a role in determining how much money you can borrow.

Do your research.

Prior to signing on the dotted line, ask any questions that you might have. Compare options and shop around for the best possible deal. Know what the origination fee, or start up fee, the closing costs, and any potential servicing fees during the lifetime of the loan are going to be. Basically, you should consider all of your options before making your final decision.

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