A reverse mortgage can be a useful retirement strategy for those who were not able to save enough capital to adequately fund their retirement for one reason or another. Essentially, a reverse mortgage is a loan a financial institution makes to you in return for equity in your home. Through either a lump sum or monthly payments, the lender will take a larger portion of your home equity as the debt loaned to you increases.
You, as the homeowner, will be allowed to remain in the home for the rest of your life while retaining the title, even if you no longer have any equity ownership in the home. Upon you passing away the debt to the reverse mortgage lender will be paid in full. Usually, this means the title will pass to the lender or the debt is paid via other assets in your estate.
However, reverse mortgages do come in different varieties. There are three basic types of reverse mortgages from which you can choose. These are single-purpose reverse mortgages, home equity conversion mortgages and proprietary reverse mortgages.
Single-purpose reverse mortgages
This government-backed loan is the least expensive out of all three types of reverse mortgages. With a single-purpose reverse mortgage you will be charged less interest and fees. However, the funds from this type of loan can only be utilized for a specified purpose, such as making repairs to the home. Therefore, this may not be the best reverse mortgage loan to choose if you are looking for general funds for retirement. Also, single-purpose reverse mortgage loans can be hard to come by and are not available in every state.
Home equity conversion mortgages
Another government-backed loan, home equity conversion mortgages (HECM) may be better for many retirees because this type of loan can be used for any purpose you want, unlike single-purpose reverse mortgages. Also, HECMs do not have any income limitations, but they do have more upfront costs. HECMs are the most popular type of reverse mortgage loans.
However, you should be aware HECMs do require you to go through financial counseling in order to ensure you are aware of the payment options and all of the associated costs. You must complete the counseling process prior to being allowed to submit an application for an HECM.
Proprietary reverse mortgages
Backed by private lenders and not the government, proprietary reverse mortgages may be attractive to many homeowners with homes exceeding the value of lending limits for HECMs which for 2022 is $970,800. Also, you will be able to save on some upfront costs since proprietary reverse mortgages are not government-backed which means paying for insurance premiums on the front-end is not required. This can allow you to borrow a larger sum.
What type of reverse mortgage is best for you?
Various factors will determine which reverse mortgage will be the best choice for you. Your current financial situation, interest rates being offered, and your objectives should all be considered. Talk to your financial advisor if you need further clarification on what to do.