The basics of a reverse mortgage show you this financial tool that has undergone many changes ever since its inception. It has been able to establish a strong presence in the world of finance. Reverse mortgages have many types, and each comes with its own specific rules and criteria.
The three main types of reverse mortgages are single-purpose reverse mortgage, home equity conversion mortgage, and proprietary reverse mortgage. However, reverse mortgage is available only to homeowners above the age of 62, and it can be utilized to pay off existing mortgages and healthcare expenses. Moreover, it can act as a supplemental income. If you satisfy the criteria for a reverse mortgage, you will not have to repay the loan unless you leave your house or sell it off.
Single-purpose reverse mortgage
This reverse mortgage is typically offered by local agencies, state, or non-profit organizations and is inexpensive. These agencies specify the reason for a reverse mortgage and help you identify one low-rate, single-purpose loan which can take care of home repair expenses or property taxes. So, this loan can be used for only one purpose only and it is liable to the lender’s discretion. These loans are not available everywhere and come with strings attached. To qualify for the single-purpose reverse mortgage, the borrower needs to have a low or moderate-income. Unlike the home equity loan that demands monthly payments, this mortgage does not have to be paid up until the ownership of the home changes or the borrower dies or anyone relocates. The only reason for this reverse mortgage is so that the owner can pay less interest than they otherwise would.
Home-equity conversion mortgage
These are insured by the federal government under the US Department of Housing and Urban Development. HECM is typically costlier than regular home loans and has high upfront costs. This is also a common reverse mortgage as there are no medical requirements, no income limitations, and you are free to use it for any purpose. You should, however, opt for counseling to know the basics of a reverse mortgage like the costs, payment options, and responsibilities included. The counseling helps you figure out how much you will be able to borrow through HECM. This amount will again depend on your age, the existing home value, and interest rates. Those who are senior and own higher equity will be entitled to more money. When the loan is established, you can choose how much you wish to pay, a tenure option, and a credit line from where you can withdraw money when you need to. You can also use a combination of monthly payments and credit line.
Proprietary reverse mortgage
This is fit for larger homes that are appraised at high values. Since this is not insured by federal authorities, you do not have to pay insurance premiums or upfront fees. As a result, you can borrow more. However, this loan is the least secure amongst all options.
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