Of all the mortgage products available today, reverse mortgages are one of the most misunderstood. And since borrowers become eligible for a reverse mortgage around the same time many retire, many people confuse them with retirement mortgages. Here is some background to help you understand the difference between a reverse mortgage vs. retirement mortgage.
What Is a Retirement Mortgage?
A retirement mortgage is a general, generic term that describes loan products geared to older Americans. Some of these products might be specifically for an older demographic, while others might be available to all age groups but possess qualities that might be of specific interest to seniors. Regardless, there are many choices.
What Is a Reverse Mortgage?
A reverse mortgage is a unique loan specifically for people 62 years old or older who have at least 50% equity in their homes and live in the home as their principal residence. These loans take part of the equity in your home and convert it into payments to you. The most common reverse mortgages are home equity conversion mortgages (HECMs). These mortgages are guaranteed by the U.S. Department of Housing and Urban Development (HUD). There are also many proprietary reverse mortgage products. These proprietary products typically have higher loan values that appeal to a more affluent customer base.
The money borrowers receive is income tax-free, and you don’t have to repay the loan for as long as you live in your home. When you pass away, sell, or move out, you, your spouse, or your estate would be responsible for repaying the loan.
Reverse mortgages are non-recourse loans, meaning you or your heirs would never own more than the original loan amount, regardless of market conditions. This means that family members will never inherit additional debt should the property decrease in value.The Federal Housing Authority (FHA)—not your heirs—is responsible for the difference.
Should the home increase in value, heirs have the option to repay the loan or sell the home and keep the profits after they repay the loan. Of course, there is a lot more to understand about reverse mortgages so it’s a good idea to do your research.
What Are the Different Types of Reverse Mortgages?
There are four types of reverse mortgages. The right one for you depends on your circumstances and financial plans.
- Home Equity Conversion Mortgages (HECMs). The most popular type of reverse mortgage, HECMs are FHA-insured loans regulated by the U.S. Department of Housing and Urban Development (HUD). HECM funds may be used for any purpose. Anyone applying for a HECM, must meet with a counselor from an independent HUD-approved housing counseling agency.
- Proprietary reverse mortgages. These reverse mortgages are privately funded. A proprietary reverse mortgage can offer higher payouts than a HECM, depending on your home’s value and your equity.
- Forward-to-reverse mortgages. These are hybrid loans that allow homeowners to tap their existing equity with a limited-term forward mortgage that automatically converts to a reverse mortgage after ten years. These mortgages work well if you don’t have ready access to all the paperwork and documents needed to qualify for other mortgages.
- Single-purpose reverse mortgages. Offered by some state and local government agencies as well as nonprofit organizations. You may use funds from these loans for only one purpose, which the lender specifies. The lender might say, for example, that the funds may only be used for property taxes or home improvements. This type of mortgage is the least expensive option of all types of reverse mortgages.
Reverse Mortgage Issues to Consider
Deciding which loan is right for you will depend on your individual circumstances, and it’s a good idea to speak with a professional financial planner to map out your retirement plan.
The Federal Trade Commission recommends you consider four things:
- Are the funds for home repairs or property taxes? Single-purpose reverse mortgages would be best for this use. To find who writes these loans, contact your local Area Agency of Aging. Ask about loan or grant programs for home repairs or improvements, or property tax deferral, or property tax postponement programs when you ask how to apply.
- Is your home of higher value? Proprietary reverse mortgages or HECMs would be best because you might be able to borrow more money. A lender or a HECM counselor would be able to compare these loans side by side to see how much you can get—and what fees you’ll have to pay.
- Fees and costs. Shop and compare. Mortgage insurance premiums may be the same, but interest rates, closing costs, origination fees, and servicing fees vary from lender to lender.
- Total costs and loan repayment. You need to understand Total Annual Loan Cost (TALC) rates. Your counselor or lender can explain them. TALC represents a reverse mortgage’s projected annual average cost, including all itemized costs.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.