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Which of the 3 Types of Reverse Mortgages is Right for You?
By: Christine Harrell
Reverse mortgages aren't new, they were introduced in 1989 but have until recently
been issued to only a small number of people due to government initiated caps. However,
because of the economic tides and the huge amount of interest in reverse mortgages,
Congress has increased the number of FHA insured reverse mortgages (RMs) allowed
annually to 250,000. As a result, the number of these types of mortgages has doubled
between 2003 and 2005.
What are reverse mortgages?
They are unique loans for people aged 62 and older that find themselves house rich
and cash poor in their retirement years. Instead of retirees being forced to sell
their home or add yet another monthly bill with a traditional second mortgage, RMs
allow homeowners to tap into their home equity while they still live in the home.
With reverse mortgages, the bank actually cuts homeowners a monthly check from the
equity in their home; money that they won't need to pay back unlike a home equity loan.
Types of reverse mortgages:
There are three types of RMs each with slight variations in form and function.
These three types of reverse mortgages are:
- Single-purpose
- Federally-insured
- Proprietary
Single purpose:
Single purpose RMs are offered by some state and local government agencies and nonprofit
organizations. These reverse mortgages generally have very low processing costs associated
with them and are available in many, but not all, areas in the US. Because these are
government funded RMs, there are more restrictions than proprietary reverse mortgages.
One of the major drawbacks of this type of mortgage is that the funds are usually limited
to particular uses such as paying taxes or making repairs. Single purpose RMs will be a
good solution for low to moderate income homeowners that need assistance to cover tax and
repair costs, but not for those who are looking to increase cash flow or tap into cash for
vacations or other purposes of their choice.
Federally-insured:
Also called Home Equity Conversion Mortgages (HECMs), these RMs are backed by the U. S.
Department of Housing and Urban Development (HUD). Unlike a private sector loan, these
government-backed reverse mortgages are federally insured.
However, like single purpose RMs, because HECM reverse mortgages are government backed,
there is more red tape to cut through to acquire the loan and more requirements to be met
than with a proprietary RM. These types of mortgages are great for those who qualify and
who plan to stay in their homes for some time. The fees associated with HECM reverse
mortgages are less than proprietary RMs and higher than with single purpose. However,
along with the higher fees comes more flexibility in how homeowners can spend their money.
Proprietary (private sector)
These reverse mortgages are private loans that are backed by individual companies. Because
these are private sector loans and governed by healthy competition, these RMs often offer
homeowners more options than the government backed mortgages. Additionally, owners of higher
value homes can tap into more of their home equity through proprietary RMs than with
government mortgages.
The fees associated with propriety RMs are higher than other types of reverse mortgages and
can be costly for those who plan on relocating shortly after acquiring a mortgage of this type.
Unlike government backed RMs, proprietary reverse mortgages do not impose restrictions on income
level, meaning that just about anyone qualified, regardless of income or home value, can enjoy
their hard-earned equity.
Reverse mortgages are one of the most creative and beneficial mortgage products today. Their benefit to
homeowners is exceptional, allowing homeowners to access their own investment during the years when
it's most needed rather than have to borrow against it. Your reasons for choosing one type of
mortgage over another are as unique as your particular situation. Before signing for any of these
mortgage types, make sure to do your research and talk with professionals to find the right RM
option for you.
Reverse Mortgages Facts
Types of Reverse Mortgages: (click on type to learn more)
Questions? Review our Reverse Mortgage Frequently Asked Questions
Ready To Act?
Apply Now
and choose Reverse Mortgage as Purpose of Loan.
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