What types of Reverse Mortgage are available?
The main reverse mortgage product obtained by homeowners is the FHA-insured HECM (home equity conversion mortgage). FHA loans have a statutory maximum loan amount of $636,150 (in high cost areas of the US, such as the Bay Area). Homeowners are eligible to receive a calculated percentage of this amount based on their age and home value. With reverse mortgages, the older you are the more you are eligible to receive. As a rule of thumb, with FHA reverse mortgages you can receive between 50 and 70% of the value of your home.
This product has two available forms:
- Adjustable rate loan: The adjustable rate HECM is the most flexible reverse mortgage plan. This loan adjusts based on the LIBOR (London interbank offer rate) index. With this plan funds may be received by the homeowner in the form of a lump sum, monthly payments, a line of credit that may be used on demand, or any combination of these. This plan has several important features:
- The monthly payment amount may be changed at any time. The homeowner may specify a fixed payment amount for the entire time of occupancy of the home, or a fixed dollar amount, which may last for the entire time of occupancy or for a shorter period, depending on the total equity available to the homeowner
- The available credit line amount increases each year based on the mortgage interest rate that is in effect at the time. Unlike traditional home equity lines of credit, a reverse mortgage credit line will never be cancelled or reduced unless the homeowner uses all available funds.
- Fixed rate loan: The fixed rate HECM provides for a single distribution of loan proceeds. Part of this is used to retire any existing mortgage debt and the balance is disbursed to the homeowner at the closing of the reverse mortgage.
Non-FHA “jumbo” reverse mortgages
A few non-government mortgage providers offer reverse mortgage products. These options are primarily used by homeowners who do not qualify for an FHA reverse mortgage because they owe more than the funds available from the reverse mortgage. The key differences between the FHA reverse mortgage and these private sources are as follows:
- All funds are disbursed at closing: the disbursement options available with the adjustable HECM do not apply.
- No mortgage insurance is collected, as these products are not government insured
- The rates are generally higher than rates on FHA HECM products, but the fees to obtain these loans are generally lower.
- These products are designed for homes with values in excess of $1 million.
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