What Are the 3 Types of Reverse Mortgages?

Reverse mortgages provide older homeowners a way to access their home equity without selling their property. As retirement planning grows more complex, understanding the different types of reverse mortgages is vital for informed decision-making.

There are three primary types of reverse mortgages, each with distinct features tailored to varying homeowner needs.

Home Equity Conversion Mortgage (HECM)

The Home Equity Conversion Mortgage (HECM) is the most common reverse mortgage in the United States, backed by the Federal Housing Administration (FHA). This government-insured product provides security for both lenders and borrowers. Available to homeowners aged 62 and older, HECMs allow conversion of a portion of home equity into cash. The amount accessible depends on factors like the borrower’s age, interest rates, and the lesser of the appraised home value or the FHA’s maximum claim amount, set at $1,089,300 for 2024.

HECMs offer flexible disbursement options, including a lump sum, monthly payments, a line of credit, or a combination. A line of credit, for example, can grow over time, increasing borrowing power—a feature that can support long-term financial planning, such as covering healthcare costs or supplementing retirement income.

To qualify, borrowers must maintain the home as their primary residence, stay current on property taxes, homeowners insurance, and upkeep. Noncompliance can lead to loan default and foreclosure. Additionally, counseling from a HUD-approved agency is mandatory to ensure borrowers fully understand their responsibilities and the loan’s implications.

Single-Purpose Reverse Mortgage

Single-Purpose Reverse Mortgages are designed for specific financial needs, such as home repairs or property tax payments. Typically offered by state and local government agencies or non-profits, these loans provide targeted support for particular expenses, making them a cost-effective option for seniors with limited financial needs.

Eligibility criteria vary by provider, often focusing on income thresholds and the intended use of funds. For instance, a local government might offer this type of reverse mortgage to low-income seniors needing essential home repairs. These loans generally have lower costs, as they are often subsidized.

Borrowers should closely review the terms, as Single-Purpose Reverse Mortgages come with restrictive conditions. Evaluating whether the loan aligns with the specific financial need is critical.

Proprietary Reverse Mortgage

Proprietary Reverse Mortgages cater to homeowners with properties exceeding the value limits of federally insured options. Offered by private lenders, they allow access to larger loan amounts, making them an attractive choice for owners of high-value homes looking to leverage substantial equity.

These mortgages are particularly appealing in high-cost real estate markets, where property values surpass the FHA’s maximum claim amount. Without federal limits, lenders can provide customized terms tailored to individual needs. However, interest rates and other loan terms vary by lender, and borrowers should carefully assess factors like fees, repayment terms, and interest rates to ensure alignment with their financial goals.

Since these loans are not government-insured, borrowers must evaluate the financial stability and reputation of the lending institution before proceeding.