Understanding the Types of Reverse Mortgage and How They Work


We’ve all heard of a mortgage before, but what about a reverse mortgage? This is a type of loan that’s a little different from a traditional loan, and a lot different from a traditional mortgage. To confuse things even further, there are different types of reverse mortgage a person can get.

Read on to find out what a reverse mortgage is, what the different types are, and whether this could be a good financial step for you to take.

What Is a Reverse Mortgage?

Reverse mortgages are a type of loan available to homeowners that are 62 or over. It allows the recipient to borrow money against the equity of their homes. The money is freely given and no payments need to be made until the last borrower moves out of the home, sells the home, or passes away.

There are some stipulations to this type of loan. The borrower must live in the house against which they have borrowed money and must own the property outright or have paid down the mortgage.

What Are the Main Types of Reverse Mortgage?

There are three main types of reverse mortgages people typically get. These are: single-purpose reverse mortgages, HECMs, and proprietary reverse mortgages.

Single-Purpose Reverse Mortgages

In terms of fees and interest, a single-purpose reverse mortgage is less costly than other types of the reverse mortgage. State agencies and nonprofits offer this type of loan. This reverse mortgage gets its name from the fact that the money must be exclusively used for a single predetermined purpose.

Home Equity Conversion Mortgage

A HECM is a federally-backed type of reverse mortgage. Congress approved it in 1987 and is backed by the Department of Housing and Urban Development. There are no stipulations about how you should spend the money received, but there are higher fees as well as some initial costs.

HECMs are the most common type of reverse mortgage. This is because they do not have minimum income or health requirements. Those applying for a HECM are required to partake in counseling to ensure they are informed of the risks and benefits of this type of loan.

Proprietary Reverse Mortgage

A Proprietary reverse mortgage refers to cases where the value of the home is especially high. More money can be loaned out, and those with low mortgages qualify for more funds. They are not as rigorously regulated as either single-purpose reverse mortgages or federally backed reverse mortgages.

Could a Reverse Mortgage Be Right for You?

If you are thinking about a reverse mortgage, the first thing you’ll need to do is to check whether you are eligible. You can check the requirements here. Once you have established that you qualify, you should carefully weigh your options.

Make sure to examine all of the risks and benefits of each type of reverse mortgage in order to assess which one is best for you. Above all, make sure to do your research.

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