Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are insured by the federal government and regulated by the U.S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages are private mortgages, not insured by the government, that are usually made to borrowers who need more than the HECM limit. Single-purpose reverse mortgages are for one specific expense. Let’s go over each type and how they work.
The 3 Types of Reverse Mortgages
Home Equity Conversion Mortgage
Home Equity Conversion Mortgages (HECMs) are the most popular type of reverse mortgage, and the only one insured by the government, specifically the U.S. Department of Housing and Urban Development (HUD). HECMs are available to homeowners who are ages 62 or older and either wholly own their residence or have paid off most of the mortgage.
When It Works Best
HECMs work best for retirees on a fixed income who need to access the equity in their homes for income. With a HECM, borrowers can receive the loan funds in a lump sum, a monthly payment, or as a line of credit. HECMs are insured by the federal government but can be originated at most lenders. The lender will underwrite the loan to ensure that the borrower qualifies based on government requirements, and that they are willing and able to keep up with property taxes, maintenance costs, and other expenses related to the property. No payments are due on the loan until the property is sold, either by the original borrower or by their estate after death. Borrowers who get a HECM line of credit only accrue interest on the outstanding balance. Prospective HECM borrowers must:
Be at least 62 years oldOwn the residence or have paid it down “considerably”Occupy the property as a principal residenceBe current on all federal debtBe willing and able maintain the property and meet all expenses
Benefits
A HECM is beneficial for seniors whose retirement assets consist mostly of their residence. Retirees who rely on Social Security and or a pension and don’t have much else in the form of assets can use a HECM to convert the equity in their home into cash to use for expenses.
Drawbacks
The main drawback is the cost. A reverse mortgage typically has a higher interest rate to compensate the lender for the amount of time it will take to be repaid on the loan. Additionally, each of the following costs may be charged:
Counseling fees Loan origination fees (up to $6,000) Closing costs Initial and continuing mortgage insurance premium (MIP) Interest Servicing fees
Proprietary Reverse Mortgage
A proprietary reverse mortgage is an all-encompassing term for non-HECM reverse mortgages offered by private lenders. They are not guaranteed by the government and are not regulated by HUD or the Federal Housing Administration (FHA).
When It Works Best
Proprietary reverse mortgages are best used by borrowers who don’t qualify for HECMs. The underwriting process likely will be similar to HECMs’, but there is no counseling requirement.
Benefits
The benefit of a proprietary reverse mortgage depends on the lender.
Drawbacks
Proprietary reverse mortgages are likely to have even higher fees and interest rates than HECMs. This is because the mortgage will likely be mostly similar to a HECM, but without the benefit of government insurance, so the lender needs to be compensated for the additional risk.
Single-Purpose Reverse Mortgage
Single-purpose reverse mortgages also are not guaranteed by the federal government. They are typically offered by local governments or nonprofits to be used for a single purpose. This purpose could be something like home repairs or unpaid property taxes.
When It Works Best
A single-purpose reverse mortgage is used for a one-time project or expense. Unlike the other two options, it can’t be used for ongoing expenses or to rebuild retirement assets. The borrower will not need to use much equity in their residence, and the lender will likely use a title company to enforce the use of proceeds.
Benefits
This product is beneficial for borrowers who need to pay a one-off expense. They won’t have to pay a lot of fees to access the equity and can access the loan funds without having to use a high-fee unsecured loan product.
Drawbacks
The main drawback is the limited use of funds. The borrower can only apply the funds to the designated use of proceeds. If something else comes up, they would need to get the loan restructured or originate a new loan. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
