A reverse mortgage is a kind of loan that is meant for homeowners aged 62 or more. As part of a reverse mortgage, the homeowners can convert a chunk of their equity into cash. This mortgage was conceived as a method to aid the retirees who have limited income utilize the accumulated wealth in their homes to provide for the everyday living expenses and healthcare. As such, there are no restrictions on how you use the proceeds of the reverse mortgage. This loan is known as a reverse mortgage because, instead of making monthly payments to the lender, as in the case of a traditional mortgage, the lender pays money to the borrower.
Below listed are the types of reverse mortgage.
1. Single-purpose reverse mortgage
Even though this kind of reverse mortgage is not as prevalent as the other two mentioned below, it still has its takers. This mortgage is mostly provided by non-profit organizations or local and state agencies. This is one of the most inexpensive reverse mortgages, and while granting the mortgage, the agency or organization will provide a specific purpose. Homeowners can utilize this mortgage’s proceeds solely to pay for the particular lender-approved item, such as paying for the property taxes or conducting home repairs.
2. Home equity conversion mortgage (HECM)
This form of a reverse mortgage is more expensive than the traditional home loan. HECM is federally insured. It implies that the mortgage is backed by the United States Department of Housing and Urban Development. And they have a high upfront cost. Since there are no medical requirements or income limitations, this is one of the most widely used reverse mortgage options.
Before you apply for the home equity conversion mortgage, you are required to seek counseling. This is vital to ensure that the homeowners feel educated on all aspects of the mortgage, such as responsibilities involved in the loan, payment options, and the cost. In this counseling session, the homeowners will be informed about any government-issued alternatives or non-profit organizations they are eligible for. They also explain the differences between the home equity conversion mortgage, proprietary reverse mortgage, and single-purpose reverse mortgage to help you make an informed choice. This counseling session is paid, and you can pay for it directly via your loan proceeds.
The prevailing interest rate, your home’s value, and your age determine the amount that you can borrow. Older homeowners who have higher equity are eligible for a more significant sum of money. For best results, you must owe as little as possible.
After the loan amount is established, you can decide between various payments, such as a credit line, which allows you to draw money from the account at any point in time, a tenure option wherein you receive monthly advances till the time your home is your primary residence, and a term option, wherein the lending agency provides monthly cash advances for a decided period. Alternatively, you can even opt for a combination of monthly payments and credit lines. You can conveniently change your payment option at a very minimal fee.
3. Proprietary reverse mortgage
For senior homeowners who have high-valued properties and seek a higher sum of their equity, the federally-set borrowing limit of the home equity conversion mortgage might be curtailing. There is the proprietary reverse mortgage or the non-federal housing administration reverse mortgage to keep up with the needs of this class of homeowners. The banks and lending agencies back the proprietary reverse mortgage. They do not have any specific requirements as per the HECM reverse mortgage regulations. They also do not need an insurance premium. Generally speaking, the fees in a proprietary reverse mortgage is lower, but the interest rate is more than what you may have to bear in the HECM. Also, in this case, the proceeds are not available in various disbursement options, such as line of credit or monthly payment.