Technically, reverse mortgage is not limited to Home Equity Conversion Mortgage (HECM). But since HECM makes up the 99% of reverse mortgage products offered in the country, it has been used interchangeably with the term "reverse mortgage" to refer to reverse mortgage in general. The reverse mortgage industry has three main products, namely:
1.)Single-purpose reverse mortgage
Of all the reverse mortgage products, single-purpose reverse mortgage has the lowest costs. This type of reverse mortgage is usually limited to low-income seniors who have some home equity. It is, however, available to limited locations offered by some state and local government agencies and nonprofit organizations. As its name suggests, this type of reverse mortgage should be used for a single purpose only like home repairs, needed home improvements like making the property handicap-friendly or pay property taxes.
2.) Proprietary reverse mortgage
Banks and mortgage companies usually offer proprietary reverse mortgage to owners of residential properties with value of at least $750,000. Because the Federal Housing Authority (FHA) does not insure this type of reverse mortgage, it is not subject to mandatory requirements like counseling. Some lenders are, however, still requiring borrowers to go through counseling so as not to put them at a disadvantage. Proprietary reverse mortgage can be costly to process and service, costlier than HECM.
HECM, the most popular of the three, has the most rules and regulations including counseling. Currently, a senior-borrower has three options when availing HECM:
- HECM Standard - HECM Standardis the traditional HECM, which started since 1989. Around 500,000 seniors are said to have HECM Standard on their residential properties. This HECM option is advisable for seniors who needed the most money they can have out of their home equity.
- HECM Saver - HECM Saver is the lower-cost version of HECM Standard introduced by Housing and Urban Development (HUD) in 2010. It has lower upfront mortgage insurance premium (MIP) equivalent to 0.01% of the value of the property as opposed to the 2% MIP for HECM Standard. This option is, however, available for 10% to 18% less than the money a senior can have via HECM Standard.
- HECM for Purchase - HECM for Purchase offers seniors the opportunity to buy a residential property where they want to move immediately using funds from the sale of their old property. This option provides seniors opportunity to acquire new place of residence and avail reverse mortgage loan at the same time. HECM for purchase is advisable for seniors who want to downsize to properties with either lower maintenance costs or with features that meet their physical needs like wider doorways, ramps and handrails.
Regardless of option, all HECM loans require borrowers to have counseling with an HECM counselor, property appraisal at the borrowers' expense and receive the loan according to chosen payment scheme.
Make An Informed Decision
Whether seniors will take single-purpose, proprietary or HECM loans, they should be familiar with the requirements and corresponding responsibilities associated with availing the loan including primary lien, occupancy, taxes and insurance, property condition and conveyance of the mortgage property once it becomes due. Reverse mortgage can be a valuable tool in maximizing liquidity during retirement, but without informed decision making and proper understanding of reverse mortgage disadvantages, it can become a senior's nightmare.
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