What Are the Different Types of Reverse Mortgages?

HECM Reverse Mortgages

The most common reverse mortgage is a Home Equity Conversion Mortgage (HECM), the only reverse mortgage insured by the Federal Housing Administration (FHA). Available to homeowners age 62 and older, it allows the borrower to convert a portion of their home equity into cash or a growing line of credit and defer repayment of the loan balance until a later date. So long as the borrower lives in the home and pays the property-related taxes, insurance, and upkeep expenses, the borrower can continue to defer repayment of the loan balance.

The HECM loan balance usually becomes due and payable when the last surviving borrower permanently leaves the home. Since a HECM is a non-recourse loan, when the loan matures and is due and payable, the FHA guarantees that neither the borrower nor their heirs will owe more than the home is worth at the time it is sold.

Note: You can use our free reverse mortgage calculator to see what you may qualify for. No personal information is required to see what you may qualify for.

Proprietary Reverse Mortgages

Over the last several years, there has been a rise in investor-owned reverse mortgage products. These are called private or “proprietary” reverse mortgages. There are a few proprietary products out there, and they tend to be similar to a HECM in many ways. Here are some situations where a proprietary reverse mortgage may be a better fit for a borrower as compared to a HECM:

• The borrower is under 62

• The borrower lives in a non-FHA-approved condo

• The borrower owns a home with a very high property value ($1 million+) and wants to access a larger percentage of the home’s equity (HECM initial disbursement limits are based on the appraised value of the home up to $1,089,300)

How Much Home Equity Do I Need to Qualify?

You must either own your home free and clear or have significant equity in your home – generally at least 50 percent.

What are the Options to Receive My HECM Loan Proceeds?

• One-time lump sum disbursement at closing

• Line of credit to draw funds as needed. This is not only a secure reserve, but funds left unused in the line don’t accrue any charges. In addition, the available line-of-credit grows over time.

• Fixed monthly advances. You can receive a tenure payment, which is a regular monthly cash advance for as long as one or more borrowers live in the home, no matter how long that is. Or a term payment, in which the monthly payment is sent for a scheduled number of months, and shorter terms result in higher monthly payments.

• Or a combination of a line of credit and fixed monthly advances.

What Percentage of My Home’s Equity Can I Borrow?

With a HECM, the percentage of your home’s equity you can borrow depends on your age, the interest rate you get on your loan, and the value of your home up to the HECM limit (currently $1,089,300). Use our free reverse mortgage calculator to determine how much equity you may qualify for.

If you choose to go with the one-time lump sum disbursement at closing option to receive your loan proceeds, you are limited to 60 percent of the principal limit (the total amount of proceeds available to you as a HECM reverse mortgage borrower). With the other loan payment options (line of credit and monthly advances), this limitation is for the first year only. After 12 months, you may access your additional funds.

When Does a Reverse Mortgage Make Sense?

Urgent Financial Need

When reverse mortgages first came out, they were primarily used by borrowers as means to finance an urgent need, like to pay for in-home care

Lifestyle Enhancement

Some borrowers do not necessarily need to access the equity in their homes, but they take out a reverse mortgage to extend the reach of their budget in order to enhance their lifestyle.

Financial Planning

Now more than ever, reverse mortgage borrowers are strategically using their home equity at the earliest age possible to potentially increase their odds of a better retirement outcome. They still may be working, and many are very well off financially, but they realize the potential strategic planning advantages of using home equity, and consequently reverse mortgages, as part of their retirement plan.