Reverse mortgages aren’t new, they were introduced in 1989 but have until recently been issued to only a small number of people due to government initiated caps. However, because of the economic tides and the huge amount of interest in reverse mortgages, Congress has increased the number of FHA insured reverse mortgages (RMs) allowed annually to 250,000. As a result, the number of these types of mortgages has doubled between 2003 and 2005.
What are reverse mortgages?
They are unique loans for people aged 62 and older that find themselves house rich and cash poor in their retirement years. Instead of retirees being forced to sell their home or add yet another monthly bill with a traditional second mortgage, RMs allow homeowners to tap into their home equity while they still live in the home. With reverse mortgages, the bank actually cuts homeowners a monthly check from the equity in their home; money that they won’t need to pay back unlike a home equity loan.
Types of reverse mortgages
There are three types of RMs each with slight variations in form and function. These three types of reverse mortgages are:
– Single-purpose
– Federally-insured
– Proprietary
Single purpose
Single purpose RMs are offered by some state and local government agencies and nonprofit organizations. These reverse mortgages generally have very low processing costs associated with them and are available in many, but not all, areas in the US. Because these are government funded RMs, there are more restrictions than proprietary reverse mortgages.
One of the major drawbacks of this type of mortgage is that the funds are usually limited to particular uses such as paying taxes or making repairs. Single purpose RMs will be a good solution for low to moderate income homeowners that need assistance to cover tax and repair costs, but not for those who are looking to increase cash flow or tap into cash for vacations or other purposes of their choice.
Federally-insured
Also called Home Equity Conversion Mortgages (HECMs), these RMs are backed by the U. S. Department of Housing and Urban Development (HUD). Unlike a private sector loan, these government-backed reverse mortgages are federally insured.
However, like single purpose RMs, because HECM reverse mortgages are government backed, there is more red tape to cut through to acquire the loan and more requirements to be met than with a proprietary RM. These types of mortgages are great for those who qualify and who plan to stay in their homes for some time. The fees associated with HECM reverse mortgages are less than proprietary RMs and higher than with single purpose. However, along with the higher fees comes more flexibility in how home owners can spend their money.
Proprietary (private sector)
These reverse mortgages are private loans that are backed by individual companies. Because these are private sector loans and governed by healthy competition, these RMs often offer homeowners more options than the government backed mortgages. Additionally, owners of higher value homes can tap into more of their home equity through proprietary RMs than with government mortgages.
The fees associated with propriety RMs are higher than other types of reverse mortgages and can be costly for those who plan on relocating shortly after acquiring a mortgage of this type. Unlike government backed RMs, proprietary reverse mortgages do not impose restrictions on income level, meaning that just about anyone qualified, regardless of income or home value, can enjoy their hard-earned equity.
Reverse mortgages are one of the most creative and beneficial mortgage products today. Their benefit to homeowners is exceptional, allowing homeowners to access their own investment during the years when it’s most needed rather than have to borrow against it. Your reasons for choosing one type of mortgage over another are as unique as your particular situation. Before signing for any of these mortgage types, make sure to do your research and talk with professionals to find the right RM option for you.
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