The equity in a person’s home is often one of their most significant financial assets. In total, homeowners age 62 and older have cumulative home equity of approximately $11.12 trillion, but that value is challenging to tap since it isn’t particularly liquid. Fortunately, a reverse mortgage makes using equity as a source of income easier. However, it’s critical to pick the right kind of reserve mortgage.
Overall, there are three primary types of reverse mortgages. Here’s an overview of how each one works, as well as tips to help you determine which is right for you.
Single-Purpose Reverse Mortgages
A single-purpose reverse mortgage is a government- or nonprofit-backed option for tapping home equity for a specific reason. As the name suggests, any funds associated with a single-purpose reverse mortgage are only usable for a particular purpose. For example, the lender may restrict the use of the money to approved home improvements or repairs.
Generally, single-purpose reverse mortgages are the most restrictive option, but they also typically cost less than home equity conversion mortgages (HECMs) or proprietary reverse mortgages. As a result, for seniors who only want funds for a specific eligible project, this is a potentially solid choice.
Home Equity Conversion Mortgages
Overall, HECMs are the most popular option among borrowers using reverse mortgages. An HECM is backed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). As a result, HECMs come with specific protections. For example, if payments received by the homeowner lead to a debt that exceeds the value of the property at the time of sale or the homeowner’s passing, the FHA usually assumes part or all of the difference.
Generally, an HECM comes with higher upfront costs, and borrowers must undergo HUD-approved counseling as part of the eligibility requirements. Once that’s done, suggesting they’re approved, funds from an HECM are potentially usable for any purpose. As a result, the money can serve as a source of income, go towards home improvements, or help you achieve other goals, depending on the arrangement.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are offered by private lenders, so they aren’t government-backed. However, they also aren’t subjected to some of the restrictions borrowers may face with HECMs. For example, HECMs have a lending limit of $1,089,300 in 2023, but that isn’t necessarily the case with proprietary reverse mortgages.
Whether counseling is required varies. Additionally, many of the financial requirements are less stringent with some proprietary reverse mortgage programs, and the fees are often lower. However, since they’re not government-backed, they may not come with the same protections that you find with HECMs.
Which One Is Best for You?
Which reverse mortgage type is best for you depends on your financial needs and goals. If you’re primarily concerned with handling a specific expense – such as home repairs or improvements – then a sole-purpose reverse mortgage is a solid choice due to its lower cost. For ongoing income, an HECM is worth considering if you have substantial equity and the total equity you’ll want to tap is below the limit. Otherwise, you might want to explore proprietary reverse mortgages.
