What Are The 3 Types of Reverse Mortgages?

Jun 27, 2024

What Are The 3 Types of Reverse Mortgages?

Reverse mortgages are a unique financial tool primarily aimed at homeowners who are retirees, offering a way to tap into home equity without the need to sell the home. Understanding the various types of reverse mortgages is crucial for anyone considering this financial step as part of their retirement planning.

Table of Contents

What are The 3 Types of Reverse Mortgages?

  1. Home Equity Conversion Mortgage (HECM)
  2. Proprietary Reverse Mortgage
  3. Single-Purpose Reverse Mortgages
  4. Final Words
  5. FAQs About Reverse Mortgages

1. Home Equity Conversion Mortgage (HECM)

Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA), represent the most common type of reverse mortgage. These loans allow homeowners to convert part of the equity in their home into cash, which they can receive in several forms: lump sums, lines of credit, or monthly disbursements. This flexibility makes HECMs a popular choice, but what does it mean to be “federally insured” by the FHA?

Being federally insured means that the Department of Housing and Urban Development (HUD) backs the loan, which provides certain protections. For instance, it guarantees that borrowers will never owe more than their home is worth at the time of repayment. 

Are you wondering if you might qualify for a reverse mortgage like an HECM? 

Typically, applicants must be 62 years or older, have the property as their primary residence, and have considerable home equity.

balance of money and home

Costs and Benefits

HECMs often involve higher up-front costs, including mortgage insurance premiums and origination fees. These are necessary because HECMs are federally insured by the FHA, which offers protection against the loan balance exceeding the home’s value.

The flexibility in payment options (lump sum, monthly payments, or line of credit) and the safety net provided by federal insurance make HECMs a preferred choice for many. The loan is available to anyone who meets the age and primary residence requirements, regardless of their home’s value.

2. Proprietary Reverse Mortgage

Moving away from federally backed options, proprietary reverse mortgages are private loans that do not have the backing of the federal government. Often referred to as “jumbo” reverse mortgages, these are tailored for individuals whose homes have high values that surpass the typical HECM limits.

One of the key differences with proprietary loans is that they do not require mortgage insurance premiums, which are a standard part of federally insured loans. This absence can lead to lower closing costs, making the loan cheaper upfront. However, without the protection of federal insurance, borrowers need to be cautious. 

Reverse mortgage lenders offering proprietary loans often set their own eligibility criteria and terms, which can vary widely. Would a proprietary loan suit your needs better, perhaps offering a higher loan amount due to the value of your home?

Costs and Benefits

Often, the closing costs can be lower since there’s no mandatory mortgage insurance. However, the interest rates might be higher or vary more than with HECMs.

Suitable for higher-value homes, these can provide larger loan amounts than HECMs. Since these are proprietary reverse mortgages, they’re tailored by private reverse mortgage lenders and can offer more flexible terms for those with valuable properties.

what are the 3 types of reverse mortgages

Single-Purpose Reverse Mortgages: Are They Right for You?

Single-purpose reverse mortgages are the least common type and are typically offered by state and local government agencies as well as non-profits for specific, approved expenses like home repairs or to pay property taxes. These loans are the least expensive option but are not as flexible as HECMs or proprietary loans.

If your needs are specific—perhaps you need to make your home more accessible or handle overdue property taxes—a single-purpose loan could be a valuable aid. However, availability is limited, and like other types of reverse mortgages, you generally need to be at least 62 years old and have the property as your primary residence.

Costs and Benefits

These loans typically have the lowest costs because they are often backed by non-profits or government agencies specifically for purposes like home repairs or to pay property taxes.

While limited in scope, they’re an economical choice if the borrower’s needs align exactly with the loan’s purpose. There’s usually no concern about overwhelming fees or complex terms.

Final Words

Reverse mortgages, such as Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages, and single-purpose reverse mortgages, provide diverse financial options for retirees looking to leverage their home equity. Each type caters to different needs and financial situations, offering various benefits and considerations. 

Whether seeking flexibility, higher loan values, or targeted financial aid, it’s crucial for potential borrowers to assess their specific requirements and consult professionals to navigate this complex landscape effectively.

FAQs About Reverse Mortgages

  • What are the main differences in costs between HECMs and proprietary reverse mortgages?

HECMs include higher upfront costs due to federally insured fees such as the FHA insurance premiums. Proprietary reverse mortgages might have lower initial costs but often feature higher or variable interest rates.

  • Can I qualify for a reverse mortgage if I still have a mortgage on my home?

Yes, you can still qualify for a reverse mortgage even if your home is not fully paid off. However, the existing mortgage balance must be low enough to be paid off with the reverse mortgage funds.

  • Are there any income requirements for obtaining a reverse mortgage?

No, there are generally no income requirements to qualify for a reverse mortgage, making them accessible to a wider range of retirees.

  • What happens if I move out of my home?

If you move out of the home, the reverse mortgage will typically become due. This means the loan must be repaid at that time, usually by selling the home.

  • Can a reverse mortgage affect my heirs?

Yes, a reverse mortgage can affect your heirs since the loan must be repaid after your death. 


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About Rob Sturms

With over three decades of experience, Rob Sturms is a trusted name in Colorado’s mortgage industry. Since 1993, he has been guiding clients with honesty and expertise through various loan options, ensuring personalized solutions for each homeowner’s journey. As the founder of Rob’s Mortgage Loans, Rob’s commitment to transparency and tailored service makes him the go-to choice for reliable lending assistance.


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