Types of Reverse Mortgages

What are the 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.

Single-purpose reverse mortgages are the least expensive option. They’re offered by some state and local government agencies, as well as non-profit organizations, but they’re not available everywhere. These loans may be used for only one purpose, which the lender specifies. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.

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 backed 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 be more expensive than traditional home loans, and the upfront costs can be high. 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 from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling.

The counselor is required to explain the loan’s costs and financial implications. The counselor also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time.

With a HECM, there generally is no specific income requirement. 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 – this lets you draw down the loan proceeds at any time, in amounts you choose, until you have used up the line of credit. This option limits the amount of interest imposed on your loan, because you owe interest on the credit that you are using.
• 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.

Shopping for a Reverse Mortgage in Utah?

If you’re considering a reverse mortgage, shop around. Decide which type of reverse mortgage might be right for you. That might depend on what you want to do with the money. Compare the options, terms, and fees from various lenders. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. And ask lots of questions to make sure a reverse mortgage could work for you – and that you’re getting the right kind for you.

Here are some things to consider:

• Do you want a reverse mortgage to pay for home repairs or property taxes? If so, find out if you qualify for any low-cost single purpose loans in your area. Staff at your local Area Agency on Aging may know about the programs in your area. Find the nearest agency on aging at eldercare.gov, or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs, and how to apply.
• Do you live in a higher-valued home? You might be able to borrow more money with a proprietary reverse mortgage. But the more you borrow, the higher the fees you’ll pay. You also might consider a HECM loan. A HECM counselor or a lender can help you compare these types of loans side by side, to see what you’ll get – and what it costs.
• Compare fees and costs. This bears repeating: shop around and compare the costs of the loans available to you. While the mortgage insurance premium is usually the same from lender to lender, most loan costs – including origination fees, interest rates, closing costs, and servicing fees – vary among lenders.
• Understand total costs and loan repayment. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates: they show the projected annual average cost of a reverse mortgage, including all the itemized costs. And, no matter what type of reverse mortgage you’re considering, understand all the reasons why your loan might have to be repaid before you were planning on it.

Be Wary of Sales Pitches for a Reverse Mortgage

Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help. But a salesperson isn’t likely to be the best guide for what works for you. This is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.

For example, some sellers may try to sell you things like home improvement services – but then suggest a reverse mortgage as an easy way to pay for them. If you decide you need home improvements, and you think a reverse mortgage is the way to pay for them, shop around before deciding on a particular seller. Your home improvement costs include not only the price of the work being done – but also the costs and fees you’ll pay to get the reverse mortgage.

Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage – even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. You don’t have to buy any financial products, services or investment to get a reverse mortgage. In fact, in some situations, it’s illegal to require you to buy other products to get a reverse mortgage.

Some salespeople try to rush you through the process. Stop and check with a counselor or someone you trust before you sign anything. A reverse mortgage can be complicated, and isn’t something to rush into.

The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal – walk away. Do some research and find a counselor or company you feel comfortable with.

Your Right to Cancel a Reverse Mortgage

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.

Report Possible Fraud

If you suspect a scam, or that someone involved in the transaction may be breaking the law, let the counselor, lender, or loan servicer know. Then, file a complaint with the Federal Trade Commission, state Attorney General’s office, or your state banking regulatory agency. Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives.

The following organizations have more information:
U. S. Department of Housing and Urban Development (HUD) HECM Program 1-800-CALL-FHA (1-800-225-5342)
Consumer Financial Protection Bureau Considering a Reverse Mortgage? 1-855- 411-CFPB (1-855-411-2372)
AARP Foundation Reverse Mortgage Education Project 1-800-209-8085