Types of Reverse Mortgages
You have three options for reverse mortgages depending on your scenario.
- Home Equity Conversion Mortgage (HECM): Insured by the Federal Housing Administration and only available through FHA-approved reverse mortgage providers. These loans can be used for any purpose.
- Proprietary reverse mortgage: This is a less popular sort of reverse mortgage for homeowners whose homes are worth more than the FHA’s ceiling, which is $765,600 in 2020. A jumbo reverse mortgage is another term for a large reverse mortgage.
- Single-purpose reverse mortgage: This is a less popular sort of reverse mortgage for low- to moderate-income seniors who need money for home repairs, enhancements, or property taxes. These loans, unlike HECMs, can only be utilized for the reason indicated by the lender.
If you pick a HECM, you will have six payment alternatives to consider:
- One-time, lump-sum payment: This is only available for fixed-rate loans.
- Line of Credit: Unscheduled payments in the amount of your choice are possible with a line of credit.
- Tenure: Fixed monthly payments for the duration of your residence.
- Term: A set number of years with fixed monthly payments.
- Modified Tenure: A lesser line of credit with smaller fixed monthly payments for the duration of your residence.
- Modified Term: A smaller line of credit with lower fixed monthly payments for a set period of time.
If you pick a proprietary reverse mortgage, the lender will determine how you get the funds. Similarly, the nonprofit or government body that offers a single-purpose reverse mortgage will determine the disbursement schedule.
Tip: Although most borrowers pick an adjustable-rate reverse mortgage, your housing consultant can assist you in determining which choice is appropriate for your specific situation.
How Reverse Mortgages Work
The initial principal limit of a reverse mortgage allows you to access a portion of your home equity. Four factors determine this limit:
- Your age is: Lenders consider the youngest borrower’s or eligible non-borrowing spouse’s age. Because of their higher life expectancy, younger borrowers receive less money.
- Current interest rates: Higher interest rates diminish one’s ability to borrow.
- Your house’s worth: The amount you can borrow is determined in part by the lesser of the appraised value of your home, the FHA maximum, or the sales price. The FHA limit in 2020 is $765,600, and the sales price is only considered if you use a HECM to acquire.
- How much you owe on your current mortgage (if applicable): You won’t be able to get a reverse mortgage if you don’t own your property outright or have at least 50% equity in it.
Your loan balance will increase over time as you make payments. Interest is accrued on the money you receive, and interest is also accrued on the interest.
