Types of Reverse Mortgages - Single Purpose, Proprietary, and HECM
According to the Federal Trade Commission, Consumer Advice:
If you’re 62 or older – and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.
As you consider whether a reverse mortgage is right for you, also consider which of the three types of reverse mortgage might best suit your needs.
Types of Reverse Mortgages
As you consider whether a reverse mortgage is right for you, also consider which of the three types of reverse mortgage might best suit your needs.
Proprietary reverse mortgages are private loans that are backed by the companies that develop them. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So if your home has a higher appraised value and you have a small mortgage, you might qualify for more funds.
Home Equity Conversion Mortgages (HECMs) are federally-insured reverse mortgages and are insured by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose.
HECMs and proprietary reverse mortgages may have different terms than conventional home loans, and the upfront costs can range. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors:
- your age
- the type of reverse mortgage you select
- the appraised value of your home
- current interest rates, and
- a financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get.
Before applying for a HECM, you must meet with a counselor. DDA Mortgage is available to help walk you through the entire process. You can give us a call at 727-784-5555, or start an application by clicking here.
Although you must qualify for a reverse mortgage, the financial assessment is not as stringent as the qualification process for traditional mortgage. However, lenders must conduct a financial assessment when deciding whether to approve and close your loan. They’re evaluating your willingness and ability to meet your obligations and the mortgage requirements. Based on the results, the lender could require funds to be set aside from the loan proceeds to pay things like property taxes, homeowner’s insurance, and flood insurance (if applicable). If this is not required, you still could agree that your lender will pay these items. If you have a “set-aside” or you agree to have the lender make these payments, those amounts will be deducted from the amount you get in loan proceeds. You are still responsible for maintaining the property.
The HECM lets you choose among several payment options:
- a single disbursement option – this is only available with a fixed rate loan, and typically offers less money than other HECM options.
- a “term” option – fixed monthly cash advances for a specific time.
- a “tenure” option – fixed monthly cash advances for as long as you live in your home.
- a line of credit – Like a traditional line of credit, you do not accrue any interest on the unused portion of your line. But very unlike a traditional line of credit, your unused portion continues to grow every 12 months. The formula for the growth of the lines varies, depending on what program you choose, but this “line of credit growth” is an incredible hedge against inflation.
- a combination of monthly payments and a line of credit.
You may be able to change your payment option for a small fee.
HECMs generally give you bigger loan advances at a lower total cost than proprietary loans do. In the HECM program, a borrower generally can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid. Taxes and insurance still must be paid on the loan, and your home must be maintained.
With HECMs, there is a limit on how much you can take out the first year. Your lender will calculate how much you can borrow, based on your age, the interest rate, the value of your home, and your financial assessment. This amount is called your “initial principal limit.”
Generally, you can take out up to 60 percent of your initial principal limit in the first year. There are exceptions, though.
If you would like to speak to a Reverse Mortgage advisor, give us a call (727) 784-5555. Or use our form below to ask a question.
Original source:
Federal Trade Commission, Consumer Advice.
Have A Question?
Use the form below and we will give your our expert answers!
Reverse Mortgage Ask A Question
Start Your Loan
with DDA todayYour local Mortgage Broker
Mortgage Broker Largo See our Reviews
Looking for more details? Listen to our extended podcast!
Check out our other helpful videos to learn more about credit and residential mortgages.
