A reverse mortgage, in simple terms, is essentially a home loan of sorts for the senior population, typically over the age of 60. Some lenders will loan to borrowers from the age of 55+. Learn about one specific type of reverse mortgage, proprietary, at https://www.investopedia.com/mortgage/reverse-mortgage/proprietary/.
These are unconventional in the sense the homeowner is not required to make monthly repayments, instead, receives funds from the lender by way of a line of credit, with a lump sum following a closing or in monthly installments.
As a rule, borrowers offset their monthly expenses with the funds or supplement their retirement income.
The funds drawn from the equity in a home won’t come due unless the homeowner passes away, fails to live in the home for 12+ months (except if an eligible co-borrower is there), stops submitting tax payments and insurance, or sells the house. Let’s look at the varied types of reverse mortgages.
Types Of Reverse Mortgages Including Proprietary
The indication is there are three varied reverse mortgages:
- “HECM” or “Home Equity Conversion Mortgages
- “Proprietary” reverse mortgages
- “Single-purpose” reverse mortgages
In the same vein, as a conventional mortgage has either an adjustable or fixed rate, the reverse mortgages also do. Of course, fixed rates are locked in to a set interest for the loan’s life. Flexible rates will fluctuate throughout the term. Check out the individual variations individually.
● “HECM” or “Home Equity Conversion Mortgages”
The Federal Housing Administration or FHA regulates these loans hand-in-hand with the US Department of Housing and Urban Development or HUD. These will only be made available through lenders who are HUD-approved. The HECM has varied options for payments like:
1. One lump sum
Following a closing, you’ll receive a lump payment in full upfront. Only fixed rates are paid with this method.
2. Monthly installments
“Term payments” are sent on a monthly basis for a set period or for the duration the homeowner remains in the home, referenced as “tenure payments.”
3. Line of credit
With a line of credit, funds can be withdrawn on an “as needed” sort of basis, while the principal not being used will continue to increase as time passes, considering the interest rate on the amount.
In attempting to explain, the indication is that a loan with an interest rate of roughly “4%” on a “$200,000” credit line that remains unused for the duration of the term will grow to approximately “$300,000” within a period of roughly ten years.
That means more money will come due than initially owed, but there will also be more available to borrow from.
Private lenders provide the proprietary sort of reverse mortgage related to specific lending companies. The loans also reference as “jumbo” reverse mortgages because they don’t have the same limitations as the HECM option.
They tend to exceed these limits, with some ranging into the millions of dollars. Neither do they need to follow the age rules as set forth by HECM, meaning lenders have the capacity to offer loans to borrowers starting at age 55.
While borrowers are required to have HUD counseling before qualifying for a HECM loan, proprietary loans are not federally backed and are void of this requirement. The monthly insurance premiums are also waived with this type of loan.
Without government backing, lenders assume greater risk and will therefore likely expect a higher interest rate with this loan type.
● “Single-purpose” reverse mortgage
With this loan type, the lender approves the designated purpose for which the borrower needs to be specific, for example, making home repairs or paying medical expenses.
Government agencies (local and state) or nonprofits provide this option, generally coming with more reasonable rates and fees. Plus, they are more readily accessible with less rigid criteria making qualifying much more straightforward than it is for either the jumbo or the HECM.
With any federally backed reverse mortgage, the expectation is that the borrower will receive counseling from HUD in order to assess prior to the application whether it’s feasible for you to afford all your anticipated expenses along with the homeowners’ insurance and property taxes after gaining access to the funds.
Because that is not the case with proprietary loans, and these have the potential for much more significant amounts of cash, the suggestion would be that the borrower reaches out to a financial counselor or consultant on their own accord to make a lucid determination before committing. View here for details on finding the best reverse mortgage.
It’s vital to become fully aware of the responsibilities that come with taking a proprietary reverse mortgage and the conditions, plus take the opportunity to shop lenders in order to get an optimum deal and ensure to work with a knowledgeable, well-established, quality lender, benefitting you significantly over the life of the loan.