Many consumers are under the impression that there is only one type of reverse mortgage. A reverse mortgage is a loan that allows consumers, ages 62 and older, to withdraw a portion of their equity. While all reverse mortgages work similarly, there are three different types of these loans: single-purpose, private, and government-funded.
Reverse Mortgage Information: Understanding HECMs
HECMs, or Home Equity Conversion Mortgage loans, make up 90% of all reverse mortgages. These loans are insured by the federal government, making them a safe choice for both lenders and borrowers. There are two main types of HECM loans: the HECM Standard and the HECM Saver.
Borrowers may also purchase a home using the HECM for Purchase program. This program allows borrowers to take a reverse mortgage and purchase a new home in one transaction. While these loans benefit certain situations, consumers seeking reverse mortgage information will usually be more interested in the Standard or the Saver.
HECM loans are given based on the age of the borrower(s) and the amount of equity in one’s home. To qualify for these loans, borrowers must be at least 62 years of age, own a one to four unit home, and use the home as their primary residence. As these loans are given based on equity, borrowers are not required to meet specific income or credit requirements.
The difference between an HECM Standard and an HECM Saver is that the Standard option allows borrowers to tap into the most equity. These loans also require borrowers to pay an upfront mortgage insurance premium of 2%. HECM Savers have lower lending limits.
To make these loans more affordable, the upfront mortgage insurance premium is reduced to 0.01%. This helps borrowers save money on fees, while only borrowing as much as they need to maintain their standard of living. While looking for information, these two loans are the ones that consumers will want to pay the most attention to.
Reverse Mortgage Information Regarding Single-Purpose and Private Loans
Due to recent regulation, single-purpose and private reverse mortgages make up a very small portion of the market. While consumers seeking information will still want to consider these loans, most borrowers find government-backed loans more beneficial.
A single-purpose type is a loan given by a government agency or nonprofit organization. These loans are typically offered to low or moderate income consumers. The benefit is that borrowers are not forced to pay expensive mortgage insurance premiums.
The downside is that borrowers are typically limited in how much they may borrow. Another possible disadvantage is that borrowers may only use the loan for a single purpose. These loans are generally used to pay property taxes or make expensive home repairs. Consumers seeking reverse mortgage information to cover these expenses may benefit from this type of loan.
A private or proprietary mortgage is one given by a private bank. Like single-purpose loans, these loans are not federally insured, which means that borrowers are not forced to pay mortgage insurance premiums. While private lenders may be more accepting of special needs borrowers, interest rates are typically higher than what is offered on federally-insured loans.
While considering a loan, consumes will want to evaluate all pertinent reverse mortgage information. Currently, HECMs dominate the market. However, consumers with unique needs may need to consider other options before applying for and accepting a loan.
By James Clapton