What Are the 3 Types of Reverse Mortgages?

By Bill Lyons | Published on August 9, 2023

With a reverse mortgage, you can grow your income with a loan you don’t have to repay until you sell the property or pass away. These types of loans are great options for retirees who meet the eligibility requirements.

Learning about the different types of reverse mortgages that are available can help you find the right option based on your needs. If you’re 62 or older and own your home, a reverse mortgage can help you continue to pay for your lifestyle when you’re no longer working.

So what are the three types of reverse mortgages, and which one is right for you? Keep reading to learn more about reverse mortgages, how they work, who qualifies, and the options available.

What Is a Reverse Mortgage?

A reverse mortgage is a financing product that allows borrowers to pull the equity they’ve accumulated out of their home, and receive payments that they can use to purchase a new home, fund repairs, pay for miscellaneous expenses, and so on. It’s like a home equity loan, which allows you to tap into your equity. However, unlike home equity loans, reverse mortgages are designed for homeowners over the age of 62, allowing them to use their homes as collateral and tap into their existing equity.

Like a traditional mortgage, you can borrow money using the home as security with the title remaining in your name. These loans can help retirees pay for healthcare expenses, other mortgages, rent, and other investments, acting as an additional source of income.

What makes a reverse mortgage stand out from any other type of home loan is that you don’t pay it back in monthly installments. Instead, repayment only happens once the borrower passes away, sells the home, or is no longer living there.

It’s important to note that with most home loans, the amount you owe decreases over time because the borrower makes monthly payments. However, with a reverse mortgage, there are no monthly payments. Therefore, the amount owed will increase over time.

These loans are best suited for individuals who have significant home equity but don’t make enough retirement income or want to grow their wealth when they’re no longer working.

With reverse mortgages, there are no income requirements, and the money you receive is tax-free, meaning even though a reverse mortgage can supplement your income, it won’t be taxed like it. Even better is the fact that the funds from a reverse mortgage can be used for anything, from covering medical bills to paying off debt.

How Does a Reverse Mortgage Work?

A reverse mortgage works similarly to any other type of mortgage in that you’ll be responsible for paying origination fees, closing costs, and insurance, depending on the type of reverse mortgage you have. However, the key difference is that with a reverse mortgage you’ll be receiving payments rather than paying off a mortgage.

Unfortunately, you won’t always be able to borrow the full amount of your home equity. Even if your home is paid off, the loan amount will depend on factors like age, current interest rates, loan limits (if applicable), and the home’s overall value. If you are older, you may be able to qualify for higher loan amounts, especially when interest rates are low.

Once approved for the loan, you won’t be required to pay it back as long as you continue to live in the home. They’re only repaid in full once the borrower passes away, sells the home, or moves out of the home. If you pass away, your heirs will either pay back the loan or give the title of the home to the lender, allowing them to sell the home to cover the balance and keep anything else earned. Your heirs can also refinance the reverse mortgage to make monthly installments.

How borrowers receive the funds depends. For instance, you may get it as a line of credit that allows you access to funds only when necessary. This option is the most popular, but it’s only available as an adjustable-rate mortgage. You can also choose to receive the money as a monthly payout or lump sum.

With a reverse mortgage, your balance will increase over time because you’re not making any payments. With some types of reverse mortgages, you may be required to pay the difference if the balance exceeds your home’s value.

Borrowers will also be responsible for continuing to pay property taxes, homeowners insurance, and HOA fees. If you fail to make these payments, you can still lose your home through foreclosure.

A reverse mortgage is a good alternative to higher-interest loans or lines of credit. For instance, the interest rate on a reverse mortgage is much lower than a personal loan or credit card, making it a viable option for supplementing income or paying for significant expenses.

Who Qualifies for a Reverse Mortgage?

Unfortunately, not all homeowners and borrowers qualify for a reverse mortgage. They’re primarily designed for individuals at least 62 years of age, and the property must be their primary residence, so it can’t be an investment property, second home, or vacation home.

To qualify for a reverse mortgage, borrowers must meet the following criteria:

• You paid a certain percentage of your mortgage or outright own the property.
• The home is your primary residence.
• You are at least 62 years old.
• You aren’t delinquent on federal debt.
• You agree to use some funds to pay for taxes, insurance, HOA fees, and maintenance.
• Your house is in good shape.

The requirements also vary by loan type. For instance, with a home equity conversion mortgage (HECM) insured by the Department of Housing and Urban Development, which we’ll discuss more in-depth later, borrowers must have reverse mortgage counseling to ensure they make the right decision.

The HECM loan also requires a financial assessment to ensure you meet the financial obligations of the loan and can comfortably repay it.

Eligible borrowers should be prepared to provide proof of income and assets when applying for a reverse mortgage since lenders want to make sure you can afford to repay the loan at one point or another.

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What Are the Different Types of Reverse Mortgages? 3 Reverse Mortgage Options

Reverse mortgages can help older individuals supplement their income by giving them access to cash when they need it most. But what are the different types of reverse mortgages? There are three options: federally insured, single-purpose, and proprietary.

While they all allow you to tap into your home’s equity, they differ in several ways. Let’s take a closer look at each to help you understand your reverse mortgage options.

Home equity conversion mortgage (HECM)

Home equity conversion mortgages (HECMs) are federally insured by HUD. They’re a popular option, but they typically come with higher upfront costs. However, this type of mortgage program doesn’t have income limitations, so anyone over the age of 62 years old may qualify. In addition, like other reverse mortgage types, the HECM loan can be used for any expense.

The HECM stands out because HUD requires counseling before you can apply for the loan. Counseling is designed to protect the borrower by ensuring they’re aware of the costs, payment options, and their responsibilities for repaying the loan. In addition, this counseling can allow you to learn about alternatives if you need access to your home’s equity.

Once you’ve completed counseling, you can learn about your loan amount. The most you can borrow with a HECM loan is $1,149,825 in 2024. How much you can actually borrow depends on your age, the value of the property, and current interest rates. The higher the interest rates, the lower your loan amount. However, you can borrow more if you’re older with higher equity.

You’ll also have different payment options available, including a line of credit, monthly cash advances, and a lump sum. You can determine which is right for you during your counseling session, but if you want to change it, HUD allows you to change your payment option for a low fee when needed.

To qualify for this type of reverse mortgage, you’ll need to be at least 62 years old and have enough equity in your home. In addition, you’ll need to have a mortgage balance that is low enough to be paid off with the loan or own the property outright.

Of course, like all mortgages, HECMs have their pros and cons. These loans can benefit retirees on limited or fixed incomes by allowing them to gain access to the equity in their homes without financing new monthly payments. They also offer flexibility in the form of repayment options, so you will only have to repay the loan once you sell the home, move, or pass away.

On the other hand, a HECM can be expensive because it has higher interest rates than traditional mortgages. And, since the amount you can borrow depends on the value of the home, you may get less money if your home value decreases.

Single-purpose reverse mortgage

Single-purpose reverse mortgages are provided by nonprofits and state and local governments. These reverse mortgages are designed to be inexpensive because they’re backed by the government and nonprofits.

Because local agencies back this type of reverse mortgage, lenders get a certain level of security, which translates to lower interest rates and fees for borrowers. Unfortunately, single-purpose reverse mortgages are the least common because these options don’t exist in every state.

While these loans are similar to home equity loans, single-purpose loans limit how the funds can be used. Ultimately, the funds can only be used for a single purpose, hence the name of this reverse mortgage type.

When you take out one of these loans, you can only use the funds for a single item approved by your lender, which can be anything from medical bills to home renovations. However, it can’t be used for more than one purpose.

Like other reverse mortgage types, single-purpose reverse mortgages don’t have to be repaid until the borrower passes away, moves to another primary residence, or sells the home.

The eligibility criteria for these mortgages will vary by lender, but in general, you must have enough equity in your home to cover the loan amount and be at least 62 years old.

While this loan can benefit borrowers who need to pay for a single item, there are better options for those needing ongoing financing access.

Proprietary reverse mortgage

The proprietary reverse mortgage is offered by private lenders and is not backed by a federal, local, or state agency. As such, these loans are best suited for individuals whose homes are appraised at higher values and who want to supplement their retirement income.

Borrowers may qualify for a proprietary reverse mortgage if their property is worth more than the limit for HECMs. The lower your mortgage balance, the more you can access. However, some lenders may require counseling to help you determine whether this loan option is the best for you based on your unique circumstances.

Like a HECM, payment options include lump sum or monthly payments. However, because these loans are not federally insured, they have fewer costs, which may allow you to borrow more.

In most cases, these loans are best suited for individuals who don’t qualify for a HECM. The qualifications are the same, but there’s no counseling requirement. Additionally, these loans allow lenders to exceed the HECM loan limit, so they’re ideal for borrowers with a high-value property who want to access more cash.

How Do I Know Which Reverse Mortgage Type is Right for Me?

Which reverse mortgage option is right for you will largely depend on your needs. The three reverse mortgage types are designed for different types of borrowers. For instance, a single-purpose reverse mortgage might be your best option if you’re looking for a fixed amount to cover a specific bill. Meanwhile, if you want to supplement your income and be able to access your home’s equity to pay for a variety of items, you may choose a HECM or proprietary reverse mortgage.

HECM is the most common of the three reverse mortgage types because it’s government-insured. However, you may prefer a proprietary reverse mortgage if you have a high-value property and want to tap into more equity since the eligibility requirements are the same.

Reverse mortgages can help borrowers supplement their income during retirement and can be used for anything from medical expenses to home improvements. Since the funds you receive are not considered taxable income, you won’t be taxed the same. However, you will incur monthly interest that rolls into the loan balance.

It’s important to understand that reverse mortgages aren’t right for every type of borrower. For instance, a reverse mortgage can affect your heirs. For instance, with these types of loans, your heirs may be unable to keep the home, which may have sentimental value. In addition, if you live with someone else, you may create potential issues.

If your family wants to take possession of the home when it’s time to repay the reverse mortgage, they must pay off the loan with their own money or get a new mortgage to cover the balance owed. Unfortunately, this can be significant since interest will be accruing every month, making it more challenging for heirs to pay off if they want to keep the home.

There are also some situations when a reverse mortgage isn’t your best option. These include:

• You want to move: If you plan to move soon, a reverse mortgage is not a good option because you’ll be responsible for repaying the loan balance when the property is no longer your primary residence. Instead, these loans are best for homeowners who plan to stay in their homes for many years to come.
• You can’t afford the costs: A reverse mortgage can help supplement your income and pay for larger expenses, but that doesn’t mean they’re free loans. When you take out a reverse mortgage, you’re responsible for closing costs, maintenance expenses, homeowners insurance, property taxes, and HOA fees that can make these loans much more expensive than you’d think. If you fall behind on these payments, a lender may require you to repay your loan balance in full, putting even more strain on your finances.
• Your family wants to keep the home: A reverse mortgage can complicate the process of passing your home on to family members. If you don’t leave them enough money or they don’t have enough to pay off the loan, your heirs might have to pass the title to the lender or take out another mortgage loan to pay off your loan principal. If they don’t get a loan, they may have to sell the house to pay off the remaining balance.

See If You Qualify for a Reverse Mortgage

A reverse mortgage can supplement your retirement income by allowing you to tap into your home’s equity. If you’re wondering whether a reverse mortgage is right for you, contact Griffin Funding today. We can help you determine whether you qualify for a reverse mortgage and help you choose the right type based on your needs and preferences.

If a reverse mortgage isn’t the right choice for you, we offer several other loan options that allow you to access your home’s equity to increase your cash flow in retirement, such as home equity lines of credit (HELOCs) and home equity loans (HELOANs). Working with one of our experienced mortgage specialists can help you determine the right option for you and your family. Contact us today or apply online.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.