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Is a Reverse Mortgage the Right Fit for You?

Reverse mortgages have pros and cons that could signficantly impact your finances. Learn about the types of reverse mortgages to determine which best fits your lifestyle and bank account.

By
Albert Cooper, Partner
3-minute read
The Quick And Dirty

If you're considering getting a reverse mortgage, reach out to your local financial institution and consider a counseling session with a financial advisor. These steps may help make the choice easier.

In 1961, a Maine-based bank created the reverse mortgage loan, and it was later adopted by the United States Department of Housing and Urban Development. Now a common financial product in the United States, many people wonder if the reverse mortgage is a right fit for them.

What is a reverse mortgage?

A reverse mortgage is a type of loan that uses the home as security. It was developed to help older homeowners with the majority of their assets in their homes supplement their life or pay for unforeseen expenses. The reverse mortgage was once reserved for Americans that were 62 or older but has since been changed to 55 or older. Many homeowners will use their reverse mortgage loan to pay off their remaining mortgage, should they have any left. Others will use it to pay for their medical expenses or supplement their current income. Borrowing against your equity is not free, and all reverse mortgages will accrue interest that will be paid when the loan is paid. Unlike typical loans, reverse mortgages do not have monthly payments, and all payments are due at the end of the loan’s term. A reverse mortgage will end when the owner sells the home, moves, or passes away.

Pros and Cons of Getting a Reverse Mortgage

Three types of reverse mortgage loans

Not all reverse mortgages are created equally, so homeowners will have choices if they are interested in acquiring one. The three types of reverse mortgages are single-purpose reverse mortgage, federally-insured reverse mortgage, and proprietary reverse mortgage. Each type has its own benefits and drawbacks; deciding which one best fits your circumstances is a choice every loaner must look into. Some notable features to note about the loans are included below.

Single-purpose reverse mortgage:

This type of loan is rarer than the other two and is often more inexpensive with lower interest rates and fees. Single-purpose reverse mortgages are typically sponsored by a state, local, or nonprofit lender. The lowered cost is matched by the high restrictions of single-purpose reverse mortgages. As the name states, these loans are reserved for a single lender-approved purpose such as taxes or repairs. This is not characteristic of mortgage loans, with the other included loans having endless possibilities for spending.

Be sure to check with your local lenders as single-purpose reverse mortgages are not always available in every area of the United States.

Federally-insured reverse mortgage:

The federally-insured reverse mortgage is backed by the United States Department of Housing and Urban Development and is also often referred to as a home equity conversion mortgage (HECM). It is the only of its type that is insured by the federal government, and there are no limitations on how the loan can be used or the income of the homeowner. Due to its flexibility, the loan is often associated with a high upfront payment and interest rate.

All homeowners interested in receiving a federally-insured reverse mortgage must attend a counseling session. The sessions are not complementary and typically cost $125. The counselor will help you learn about the ins and outs of a reverse mortgage, as well as provide you with information about rates, payment options, and costs. Interested homeowners can estimate the size of their loan using an online reverse mortgage calculator, but the counseling session will be able to give you a more accurate estimate. The size of your loan will vary greatly due to factors such as age and home equity. Older homeowners that own a large portion of their home or have fully paid off their home will typically receive a lower rate and higher loan allowance.

Proprietary reverse mortgages:

Homeowners with high-value homes often consider proprietary reverse mortgages since they are backed by private lenders. Private institutions will consider higher loans for high-value homes, and an interested homeowner may be able to reach the 2022 lending limit of $970,800 with a private lender.

Counseling may be required, but it will vary depending on the lender. If you are considering proprietary reverse mortgages, be sure to bring up a HECM reverse mortgage with your counselor. They will be able to tell you which lenders are a better option for your specific case. Remember to do your own due diligence and compare multiple proprietary reverse mortgage lenders and HECM providers.

Since proprietary reverse mortgages are private, homeowners are not required to pay an upfront cost of mortgage insurance premiums. Interest rates will vary according to providers.

Should you get a reverse mortgage?

Reverse mortgages have become a popular loan option since they began in 1961, so it is not strange that many older homeowners are interested in the financial product. It certainly has its benefits, but there are also drawbacks. No one can make this decision for you, but reaching out to your local financial institution and considering a counseling session may help make the choice easier.