The 3 Types of Reverse Mortgages: Choosing the Right Option

Reverse mortgages offer seniors a way to tap into their home’s equity, providing access to cash that can help with retirement needs. But did you know there are different types of reverse mortgages to consider? Learn more about how reverse mortgages work if you’re just getting started.

In this guide, we’ll explain the three main types of reverse mortgages: the Home Equity Conversion Mortgage (HECM), Jumbo Reverse Mortgages, and Single-Purpose Reverse Mortgages. We’ll break down how each one works, their eligibility requirements, and the benefits of each, so you can make the best decision based on your specific needs.

What Is a Reverse Mortgage?

A reverse mortgage is a financial product that allows homeowners aged 62 and older to convert part of their home equity into cash. The key feature of a reverse mortgage is that you don’t have to make monthly mortgage payments. Instead, the loan is repaid when you sell the home, move out, or pass away.

Now that you know the basics of reverse mortgages, let’s explore the three main types and how they differ.

1. Home Equity Conversion Mortgage (HECM)

The Home Equity Conversion Mortgage (HECM) is the most common and most popular type of reverse mortgage. It’s insured by the Federal Housing Administration (FHA), making it a safe and reliable option for seniors.

Benefits of a HECM:

• Federally Insured: HECMs are backed by the government, which means you’ll never owe more than your home’s value.
• Flexible Payout Options: You can receive your funds as a lump sum, monthly payments, or a line of credit — or a combination of all three.
• Widely Available: HECMs are available for most single-family homes and FHA-approved condominiums.

2. Jumbo Reverse Mortgages

If you own a high-value property, a jumbo reverse mortgage may be the right choice. Unlike HECMs, jumbo reverse mortgages are for properties that exceed the FHA limits. With a jumbo reverse mortgage, you can access more equity from your home, which can be especially useful if your home’s value exceeds the limits of a HECM.

Benefits of a Jumbo Reverse Mortgage:

• Higher Loan Limits: You can access more equity, which is ideal for those with high-value homes
• Flexible Terms: Similar to HECMs, jumbo reverse mortgages offer flexibility in how you receive funds, whether through a lump sum, monthly payments, or a line of credit.
• No FHA Insurance: Since jumbo reverse mortgages are not FHA-insured, they are not subject to the same limits as HECMs, providing access to larger loan amounts.

Eligibility:

• Age 62 or older
• Primary residence
• Significant home equity
• Good credit and financial standing
• Higher home value (to qualify for larger loan amounts)

Jumbo reverse mortgages are typically not insured by the government, so they may have higher interest rates and higher fees than HECMs.

3. Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages are the least common of the three options and are typically offered by state or local government agencies or non-profit organizations. As the name implies, this type of reverse mortgage can only be used for a specific purpose, such as home repairs, property taxes, or other approved expenses.

Benefits of a Single-Purpose Reverse Mortgage:

• Lower Fees: Single-purpose reverse mortgages usually come with lower fees and lower interest rates compared to HECMs or jumbo reverse mortgages.
• Simple Process: The application process is simpler and quicker than for other types of reverse mortgages.
  

Eligibility:

• Age 62 or older
• Primary residence
• Limited financial resources
• Use of funds must be for an approved purpose, such as home repairs or paying taxes
  

The biggest downside of a single-purpose reverse mortgage is that you can only use the funds for the specific purpose it was designed for. This makes it a less flexible option for those who want to use the money for a variety of retirement needs.

Choosing the Right Reverse Mortgage for You

Now that you know about the three main types of reverse mortgages, how do you choose the best one for you?

• HECM: If you want flexibility in how you receive your funds and need a federally insured option, HECM is likely the best choice.
• Jumbo Reverse Mortgage: If your home is highly valued and you need access to more equity, a jumbo reverse mortgage could be the solution.
• Single-Purpose Reverse Mortgage: If you have a specific need, such as home repairs or paying off property taxes, and you’re looking for a lower-cost option, a single-purpose reverse mortgage might be your best bet. You can also explore using a reverse mortgage to buy your next home as another retirement strategy.

In all cases, it’s important to work with a trusted reverse mortgage advisor who can help you compare reverse mortgage loan rates and ensure that you’re choosing the right type for your needs.

Before deciding, it’s helpful to explore the pros and cons of reverse mortgages to make a fully informed choice.

Reverse Mortgage Line of Credit

In addition to these three types of reverse mortgages, many homeowners choose a reverse mortgage line of credit. This option allows you to access funds as needed without taking a lump sum upfront. Over time, the credit line grows, giving you increasing access to funds as your home’s value appreciates or interest rates change. This flexibility makes the reverse mortgage line of credit an excellent option for those who want to maintain control over their finances while still tapping into their home’s equity.

Talk to a Reverse Mortgage Specialist

At South River Mortgage, we specialize in helping homeowners navigate the reverse mortgage process. Our team can explain the reverse mortgage loan rates and help you choose the best option based on your home’s value, financial goals, and retirement needs.