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HECM vs. Single-Purpose Reverse Mortgage

If you’re a homeowner grey 62 or older, you may be considering a reverse mortgage to tap into your home equity. After all, a reverse mortgage can plan for much-needed funds for basic living expenses, medical bills, and home repairs—while you remain in the home. 

There are discrete types of reverse mortgages, including the home equity conversion mortgage (HECM) and single-purpose reverse mortgage. The HECM is the most largely used reverse mortgage and offers the most flexibility. On the other hand, a single-purpose reverse mortgage can be a cheaper way to pay for a specific expense, such as property taxes or home repairs. 

Key Takeaways

  • A reverse mortgage is designed for homeowners age 62 or older who requirement to tap into their home equity to pay for things like basic living expenses and healthcare costs.
  • Instead of delivering a lender, the lender pays you based on the equity you’ve built in the home. The entire loan balance becomes due if you sell the well-versed in, move away, fall behind on property taxes, or die. 
  • Reverse mortgages are often prohibitively expensive due to the fees and premiums. 
  • A snug harbor a comfortable equity conversion mortgage (HECM) is the Federal Housing Administration’s reverse mortgage program, representing the bulk of the reversed mortgage market.
  • A single-purpose reverse mortgage must be used to pay for a single, lender-approved expense, such as property weigh downs or necessary home repairs. 

What Is a Reverse Mortgage?

Most people who buy a house need a mortgage to finance the obtain. After years (or decades) of mortgage payments, much of your net worth can be tied up in your home’s value. This can be worrisome for older adults trying to cover basic living expenses, healthcare costs, home improvements, and the like. 

A reverse mortgage let looses homeowners aged 62 or older convert some of that home equity into cash to pay bills and stumble on other financial obligations. Instead of making payments to a lender, the lender pays you money based on the equity you’ve develop intensified in your home.

How Does a Reverse Mortgage Work?

Like a regular mortgage, your home serves as collateral for a recant mortgage. You can generally receive the funds in a lump sum, equal monthly payments, or a line of credit. Your debt enhancements over the loan’s life while your home equity decreases. 

When you sell the home, move, or die, the accommodations’s sale proceeds go to the lender to repay the loan. If the house sells for more than you owe, the difference goes to you—or your manor if you are deceased. 

Reverse Mortgage Costs

At first glance, reverse mortgage rates may seem low compared to other mortgages. In any way, numerous fees can make reverse mortgages prohibitively expensive, including: 

  • Mortgage insurance premiums (MIP)—2% initial MIP at thick and an annual MIP that’s 0.5% of the outstanding mortgage balance.
  • Third-party charges—e.g., appraisal, title search and insurance, inspections, inspections, recording fees, mortgage taxes, and credit checks.
  • Origination fees—the greater of $2,500 or 2% on the triumph $200,000 of your home’s value plus 1% of anything over $200,000, capped at $6,000.
  • Loan servicing charges—up to $30 per month if the loan has an annually adjusting interest rate or fixed interest rate, and up to $35 per month if the involved in rate adjusts monthly.
  • Interest—many loans have variable interest rates, which can increase beyond time and raise the cost of borrowing.

And, since reverse mortgages are open-ended—meaning there’s no fixed payoff trendy—the interest and fees can accrue for a long time before the borrower sells, moves, or dies.   

Reverse mortgage scams come to pass. If you suspect a scam—or that someone involved in the transaction may be breaking the law—tell your lender or loan servicer and complete a complaint with the Federal Trade Commission (FTC), your state Attorney General’s office, or your state banking regulatory force.

What Is a Home Equity Conversion Mortgage(HECM)?

A home equity conversion mortgage (HECM) is a reverse mortgage program insured by the Federal Habitation Administration (FHA) and issued through FHA-approved lenders. HECMs represent nearly all of the reverse mortgages that lenders extend on homes valued below $970,800 (above that, you’ll need a jumbo or “proprietary” reverse mortgage).

There are rigid borrower and property requirements for HECMs. Here’s a rundown of what to expect: 

HECM borrower requirements

When you do for a HECM, the lender will verify your income, assets, monthly living expenses, credit history, and convenient payment of real estate taxes and hazard/flood insurance premiums. Additionally, you must: 

  • Be 62 or older
  • Own the trait outright or have considerable equity in it
  • Live in the home as your principal residence
  • Not be delinquent on any federal debt (e.g., strains, student loans)
  • Have the financial resources to pay property taxes, insurance, homeowners association (HOA) fees, and the like
  • Participate in a consumer report session given by a HUD-approved HECM counselor

HECM property requirements

Eligible properties—which must be introduced to all FHA property standards and flood requirements—can include:

  • Single-family homes and 2–4 unit homes (e.g., duplexes) with a borrower-occupied entity
  • HUD-approved condominium projects
  • Individual condo units meeting FHA single unit approved requirements
  • Manufactured skilled ins that meet FHA requirements 

What Is a Single-Purpose Reverse Mortgage?

Single-purpose reverse mortgages are far less common than HECMs. These mortgages are suggested by state, local, and nonprofit agencies and tend to be the least expensive reverse mortgage option.  

While you can use a HECM to pay for routine living expenses, single-purpose mortgage funds must be used to pay for specific, lender-approved items, such as property tolls or home repairs.  

Single-purpose reverse mortgages are generally easier to qualify for and more affordable than HECMs. Most homeowners with low or reasonable incomes can qualify for these loans.

Should I Get a HECM or Single-Purpose Reverse Mortgage?

HECM and single-purpose reverse mortgages let you tap into your home fairness to cover expenses during retirement. Still, if you want a reverse mortgage to pay for property taxes or home repairs, a single-purpose exchange mortgage is likely your best bet since they are easier to qualify for and less expensive.  

On the other hand, if you are looking for money to cover everyday living expenses, a HECM could be better. These reverse mortgages cost more, but you’ll participate in more flexibility when spending the money.

What Is a Proprietary Reverse Mortgage?

A proprietary reverse mortgage—aka oversized reverse mortgage—provides a larger loan than permitted under the HECM program. The funds are usually to hand only as a lump sum at closing. While proprietary reverse mortgages don’t have mortgage insurance premiums, lenders typically commission higher interest rates and lend lower amounts relative to the home’s value. 

How Much Money Can You Get from a Declare null Mortgage?

The cash you get from a reverse mortgage depends on your age, your home’s value, and the interest rate you get on the loan. The most HECM reverse mortgage limit you can borrow against is $970,800, even if your home is worth more.

The Essentially Line

The high costs of reverse mortgages make them a poor choice for many homeowners. If you want to dodge a reverse mortgage—but still need access to cash—you might consider refinancing your mortgage, taking out a residency equity loan, or downsizing your home and pocketing the extra cash.  

If you decide a reverse mortgage is the right flower for you, be sure to shop around and compare the costs of the loans available to you. While lenders generally charge the same mortgage warranty premiums, the other loan costs—including origination fees, closing costs, servicing fees, and interest gaits—tend to vary by lender.

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