The three types of reverse mortgage
A reverse mortgage lets seniors tap into their home equity while eliminating their monthly mortgage payment. This can free up cash for other retirement expenses, like home repairs or healthcare costs.
But many people don’t realize there are actually three different types of reverse mortgages you can choose from. Understanding how each one works and the type of borrower it’s best for will help you pick the right option for your situation.
See if you qualify for a reverse mortgage. Start here.
1. Home Equity Conversion Mortgages (HECM)
A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage, accounting for 90% of the reverse mortgage market.
HECMs are backed by the Federal Housing Administration (FHA), and are only available through FHA-approved lenders. This makes them the least risky type of reverse mortgage, but they’re also the most expensive due to higher upfront fees.
Before you can take out a HECM, you must complete a mandatory session with an HUD-approved housing counselor. During that counseling session, you’ll learn about the different costs involved and your responsibility for maintaining the property and home insurance payments.
After this session, you’ll learn how much you’re eligible to borrow with a HECM. Once the loan is approved, you can receive the funds as a lump-sum payment, a fixed monthly payment over a period of time, or as a line of credit.
HECMs are best for borrowers aged 62 or older who want to take advantage of the consumer protections provided by the FHA and federal mortgage insurance. It’s also a good choice for borrowers who want access to a line of credit with no restrictions on how you spend it.
2. Jumbo reverse mortgages
A jumbo reverse mortgage is also referred to as a proprietary reverse mortgage, and it allows borrowers to borrow up to $4 million in home equity. This type of reverse mortgage isn’t backed by the FHA, so there are fewer hurdles to jump through, but there are also fewer borrower protections.
Because they’re private loans, each lender can set their own eligibility criteria for jumbo reverse mortgages. However, most lenders require that you have at least 50% equity and use the home as your primary residence. You may also need to demonstrate the ability to pay the property taxes, homeowners insurance, and maintain the property.
See if you qualify for a reverse mortgage. Start here.
One big difference between HECMs and jumbo reverse mortgages is the age requirements. HECMs are only available to homeowners aged 62 or older, but you may qualify for a jumbo reverse mortgage as young as 55.
Like HECMs, you can receive the funds as a lump-sum payment, in regular monthly intervals, or as a line of credit. Because the borrowing limits are so much higher, you’ll likely pay higher interest rates on a jumbo reverse mortgage. And because there are fewer regulations, these reverse mortgages are more prone to scams.
Still, jumbo mortgages can be a good option for homeowners with most of their money tied up in a high-value property. They’re also an alternative for borrowers who don’t meet the requirements for a HECM, like borrowers aged 55 or older, or homeowners with ineligible property types.
3. Single-Purpose Reverse Mortgages
A single-purpose reverse mortgage gives homeowners access to their home equity for a specific purpose, like paying down credit card debt or completing home repairs.
See if you qualify for a reverse mortgage. Start here.
The funds can only be used for a single purpose, and they must be approved by your lender. In comparison, HECMs and jumbo reverse mortgages allow you to use the funds in any way you want.
Single-purpose reverse mortgages do tend to come with fewer fees and lower interest rates. The application process is also much simpler, and it can be easier for low-income borrowers to qualify for. Single-purpose reverse mortgages tend to be best for borrowers who have a specific need they’re looking to finance and want a low-cost option.
The bottom line on reverse mortgages
The best type of reverse mortgage varies depending on your circumstances and goals. For instance, if you want flexibility and government-backed protections, a HECM may be the best fit.
Homeowners with high-value properties or who don’t meet the FHA requirements could benefit from a jumbo reverse mortgage. Whereas individuals with a specific, one-time need could save money with a single-purpose reverse mortgage.
Before making your selection, make sure you understand the costs, eligibility requirements, and long-term implications of each type. It may be a good idea to speak to a HUD-approved housing counselor or financial advisor. They can help you determine which reverse mortgage best suits your immediate needs and fits with your retirement plans.
