Following are the types of reserve mortgages:
- Single Purpose Reverse Mortgage
- Home equity Conversion Mortgage
- Proprietary Reverse Mortgage
Single purpose Reverse Mortgage
Non- profit organizations, local and state agencies offer single purpose reverse mortgage and it is not federally insured. This reverse mortgage is considered as the least expensive reverse mortgage. It is meant to be used for one particular and approved purpose, or to pay off current mortgages. For instance, payment of property taxes, health care expenses, repairing of home or supplementing of current income. Area agencies help people in finding low-cost single purpose loan.
Single purpose reserve mortgage is lower in cost because it uses only a little amount of equity and is anticipated for seniors having low to medium income levels and is only given to people who are 62 years or older.
Home Equity Conversion Mortgage (HECM)
Home Equity Conversion Mortgage (HECM) is the most popular of the three types of reverse mortgages. It is formed by the HUD (Department of Housing and Urban Development) and insured by the federal government. Home Equity Conversion Mortgage (HECM) loans permit borrowers to access a share of their equity based on the borrower’s age and also the home’s value. Each year the borrower has to pay a mandatory insurance fee of 1.25% of the loan balance.
Following are the two options from which people can choose while applying for a Home Equity Conversion Mortgage loan.
- Payment of loan proceeds: Money can be received as monthly installment, line of credit, a combination of line of credit and monthly installment or a lump sum.
- Interest Rate: People opting for this option can choose between an adjustable interest rate and fixed interest rate. When an interest rate is low, the option of fixed rate is helpful in locking it. However, fixed interest rates are only offered with the lump sum payment option.
For special circumstances, two special purpose loan options are offered by HECM program
- HECM for Purchase: This option allows purchasing a home using money from a reverse mortgage loan.
- HECM Refinance: This option allows conversion of one HECM loan into another. The reason of refinancing is to get a lower interest rate.
Proprietary Reverse Mortgage
Private money lending organizations offer this kind of reverse mortgage. The three factors; age, income and the worth of the property (that belong to the senior home proprietor or owner) decide the amount or quantity of cash the borrower can easily qualify for, using proprietary reverse mortgages. Proprietary reverse mortgages are ineligible for federal insurance. Hence, they are more expensive and hold higher interest rates.
There can be more accommodation by proprietary lenders for borrowers having specials needs or the ones ineligible for HECMS. Proprietary reverse mortgages are not subject to all the same standards as Home Equity Conversion Mortgages, but as a regular best practice, most organizations offering this type of reverse mortgages follow the same consumer protections as found in Home Equity Conversion Mortgages program that also includes mandatory counseling. Because of being taken on higher valued homes, proprietary reverse mortgages are also called “jumbo loan program”.
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