Though reverse mortgages sometimes get a bad rap, the truth is they can make good financial sense for many senior citizens in need of cash during their retirement and twilight years. Many people don't realize that there are different types of reverse mortgages available through different organizations and for different purposes. Determining which is the best for you will take research and careful consideration.
How Does a Reverse Mortgage Work?
Only individuals who are at least 62 years old and have equity in their home are eligible to take advantage of a reverse mortgage. The house does not have to be completely paid off to take out a reverse mortgage, and the homeowner does not need to give up the title of the house. A reverse mortgage gives the lender a sum of tax-free money from their existing home equity.
As with any loan, the borrower may be responsible for paying some fees and closing costs when they take out a reverse mortgage. While drawing on a reverse mortgage, the borrower still needs to pay normal property taxes and insurance on the home. Unlike a traditional loan, the interest is not due on a reverse mortgage until the borrower sells or moves out of the home. If the borrower passes away before the reverse mortgage is paid off, the lender will be repaid from the remaining value of the estate. The debt will not be passed on to heirs, and other assets will not be affected.
The Three Types of Reverse Mortgages
Single-purpose Reverse Mortgage
A single-purpose reverse mortgage is offered by local, state and non-profit agencies. It is the least expensive of the three types, and must be used for a stated specific purpose, such as home repairs or property taxes. A local Agency on Aging can help put you in touch with the organizations that can provide this type of reverse mortgage.
Home Equity Conversion Mortgage (HECM)
HECMs are backed by the U.S. Department of Housing and Urban Development. They are federally insured, but will cost the borrower high upfront costs. HECMs are the most popular type of reverse mortgage because they can be used for any reason and they carry no income limitations or medical requirements. Once the loan is established, you can choose between several payment options, such as a term option that pays monthly cash advances for a specific time or a credit line that you can tap as needed.
Before you are approved for an HECM, you must undergo a counseling session where you will be educated about the costs and other options. After the session, you will be able to learn how much you can borrow with an HECM. Typically, those who are older and have more equity in their homes are allowed access to more money.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are available only to those who have homes that appraise at a high value. Borrowers who owe less on their homes will have access to more cash. Usually, these mortgages are available through private lending companies and are used when the borrower requires a large cash advance.
In some situations, a counseling session is required before applying for this type of reverse mortgage to ensure the borrower understands the costs and benefits compared to other options.
If you feel you or an aging family member might benefit from access to cash through a reverse mortgage, contact a local Agency on Aging or a trusted financial advisor, and read up online to learn more about the options.