Reverse mortgages can be a lifesaver for seniors who are struggling to make ends meet in retirement. They allow homeowners to convert part of their equity into cash, which can be used to pay for living expenses, medical bills, or other needs. But with so many different types of reverse mortgages available, it can be difficult to know which one is right for you. In this blog post, we'll explore the three most common types of reverse mortgages and the pros and cons of each.
1. Home Equity Conversion Mortgages (HECMs)
HECMs are by far the most popular type of reverse mortgage. They are backed by the Federal Housing Administration (FHA) and are available to homeowners who are at least 62 years old. With an HECM, you can receive a lump sum payment, a line of credit, or a combination of the two. The loan is repaid when the homeowner moves out of the home or passes away.
One of the biggest advantages of HECMs is that they are insured by the FHA, which means that if the balance of the loan exceeds the value of the home when it is sold, the government will cover the difference. However, HECMs can be more expensive than other types of reverse mortgages because they require mortgage insurance premiums and fees.
2. Proprietary Reverse Mortgages
Proprietary reverse mortgages are offered by private lenders and are not backed by the government. They are available to homeowners who have high-value homes and are looking to borrow larger amounts of money. These loans are not subject to the same regulations as HECMs, which means that the interest rates and fees can be higher.
However, proprietary reverse mortgages can also be a good option for homeowners who have a lot of equity in their homes but are not eligible for an HECM. They can be used to pay off existing mortgages or to make home improvements.
3. Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages are offered by state and local government agencies and non-profit organizations. They are designed for seniors who have low to moderate incomes and who need to pay for a specific expense, such as home repairs or property taxes.
The advantage of single-purpose reverse mortgages is that they are typically the least expensive option. However, they are also the most restrictive, as they can only be used for one specific purpose. They are not available in all areas, and the amount you can borrow may be limited.
Choosing the right type of reverse mortgage depends on your individual needs and financial situation. If you're considering a reverse mortgage, it's important to do your research and speak with a financial advisor to determine which option is best for you. Remember, a reverse mortgage is a big decision, and it's important to understand the pros and cons before you sign on the dotted line.