In the press (and here on the Reverse Mortgage blog), so-called Home Equity Conversion Mortgages (HECMs)get most of the attention, and for good reason. By most estimates, HECMs account for more than 90% of reverse mortgage lending nationwide, and are generally safer for both borrower and lender. Still, it’s important for prospective borrowers to realize that there are two other types of reverse mortgages which may be available to them.
The first type is known as a single-purpose reverse mortgage. They are offered mainly by state and local agencies and by some non-profit organizations. They differ from HECMs in a couple important ways. The first is that they are not federally insured, which means that the mortgage insurance premium – which represents more than half of the closing costs on an HECM mortgage – doesn’t need to be paid. When you also factor in the annual insurance premiums, this could save you more than $10K over the life the of the mortgage. While you would assume that the lack of insurance would make such mortgages more risky, you would be wrong. That’s because reverse mortgage insurance serves to protect the lender against default (even though the premiums are paid by the borrower), so the lack of insurance in this case is a risk born exlclusively by the lender.
The other major difference is the way in which single-purpose reverse mortgage proceeds can be used. Most lender agencies will stipulate that the loan can only purpose, namely to repair/renovate the home and/or pay property taxes. For better or worse, no such limitation exists on HECM loans, the proceeds from which can be spent as the borrower pleases. This distinction is also connected to the lack of insurance. Single-purpose reverse mortgages typically involve only a small portion of home equity, which means default is unlikely. With an HECM loan, in contrast, a borrower can obtain up to 60% of the value of his home, which significantly raises the possibility of default, and thus necessitates the HUD insurance policy.
If you are interested in a single-purpose mortgage, you can consult our list, which has state-specific information. You can also check the Elderware Locator, a service of the federal Department of Health and Human Services, which can help you find “local agencies, in every U.S. community, that can help older persons and their families access home and community-based services.” You can also ph0ne them for the most up-to-date information. Be advised that some applicable programs don’t explicitly invoke the term reverse mortgage, and you might have better luck if you query “property tax deferral” or “loan programs for home improvement.” For all intents and purposes, however, these programs function as reverse mortgages, and if you’re already considering an HECM, you might as well look into single-purpose reverse mortgages for the sake of comparison.
The other type of reverse mortgage is known as a proprietary reverse mortgage. As the name suggests, such loans are underwritten by private lenders. While still subject to government regulation, they are not subject to the same standards as HECM reverse mortgages, and are not eligible for federal insurance. As a result, these mortgages tend to be more expensive and carry higher interest rates, but proprietary lenders may be more accommodating for borrowers with special needs and/or are not eligible for HECMs. As the FTC points out, “HECM loans are widely available, have no income or medical requirements, and can be used for any purpose.”
Conventional wisdom suggests that your best bet for a “multi-purpose” reverse mortgage is still the HECM. For a smaller loan used to pay taxes and/or improve your home, however, do yourself a favor and check out single-purpose reverse mortgages.
4 Responses to “Reverse Mortgages: 3 Different Types”
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June 5th, 2010 at 7:57 am
[…] 2. The next step is to select the type of reverse mortgage that you wish to obtain. While for many, an HECM reverse mortgage is the obvious choice, it also makes sense to examine single-purpose and proprietary reverse mortgages, as they may offer better terms. I explained the difference in a previous post. […]
August 16th, 2011 at 4:19 pm
how do I find a proprietary reverse mortgage lender?
I live in Los Angeles County, CA
February 1st, 2012 at 12:15 pm
Can you tell me an institution that offers proprietary reverse mortgages?
October 23rd, 2014 at 12:12 pm
I have a reverse mortgage and there is interest charges every month , do I have to pay that?roseann rutar