Understanding the Reverse Mortgage Landscape
A reverse mortgage is a financial tool designed for older homeowners who want to convert a portion of their home equity into cash. Unlike a traditional mortgage, which requires monthly payments to build equity, a reverse mortgage provides cash payments to the borrower, and the loan balance increases over time. The loan is typically repaid when the borrower sells the home, moves out permanently, or passes away.
There are three main types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM): This is the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA).
- Proprietary Reverse Mortgage: These are private loans not insured by the federal government. They are often referred to as 'jumbo' loans because they can offer larger loan amounts for high-value homes.
- Single-Purpose Reverse Mortgage: These are typically offered by state and local government agencies or non-profit organizations for a specific, pre-approved use, such as home repairs or property taxes. They are the least expensive option but have restricted use.
The Federal Standard: What is a HECM Mortgage?
A Home Equity Conversion Mortgage (HECM) is the only reverse mortgage product insured by the U.S. federal government through the FHA. This federal backing offers unique protections that set it apart from other types of reverse mortgages. An HECM is specifically designed for homeowners aged 62 or older who either own their home outright or have significant equity.
Key features of an HECM include:
- Mandatory Counseling: Before applying for an HECM, prospective borrowers are required to complete a counseling session with a HUD-approved counselor. This ensures they understand the loan's costs, alternatives, and obligations.
- Payout Flexibility: Borrowers can choose to receive funds in several ways: a lump sum, a line of credit, fixed monthly payments for a set term, or monthly payments for life (known as tenure).
- Non-Recourse Protection: HECMs are non-recourse loans, meaning the borrower or their heirs can never owe more than the home is worth when the loan is repaid. The FHA insurance covers any deficit.
- Financial Assessment: Lenders are required to conduct a financial assessment to ensure the borrower has the capacity to pay for ongoing property charges, such as taxes and insurance. In some cases, funds may be set aside to cover these costs.
Key Differences at a Glance
This table highlights the crucial distinctions between the main types of reverse mortgages.
| Feature | HECM (Home Equity Conversion Mortgage) | Proprietary (Jumbo) Reverse Mortgage | Single-Purpose Reverse Mortgage |
|---|---|---|---|
| Federal Insurance | Yes (FHA-insured), provides non-recourse protection. | No, not federally insured. | No, not federally insured. |
| Minimum Borrower Age | 62 or older. | Can be as low as 55 in some states. | Varies, but often 62 or older. |
| Loan Limits | Subject to a national lending limit set by the FHA ($1,209,750 for 2025). | Higher loan limits, often targeting homes with higher values. | Typically small loan amounts and restricted to specific purposes. |
| Payout Options | Flexible: lump sum, line of credit, fixed monthly payments, or a combination. | Varies by lender, but often provides larger lump sum options. | Often a lump sum or specific payment to a third party for repairs/taxes. |
| Use of Funds | Unrestricted; can be used for any purpose. | Unrestricted; can be used for any purpose. | Restricted to specific purposes defined by the lender. |
| Counseling | Mandatory for all borrowers. | Not required by federal law, but some lenders may offer it. | May be required depending on the program. |
Weighing Your Options: Pros and Cons
Choosing the right reverse mortgage requires careful consideration of your financial situation and retirement goals. Here are some of the key pros and cons of each type.
HECM Pros
- FHA Insurance: Provides protection that the loan will not exceed the home's value, shielding you and your heirs from liability if the home's value declines.
- Wide Availability: As the most common type, HECMs are offered by many FHA-approved lenders across the country.
- Multiple Payout Options: The variety of payment plans offers flexibility to meet different financial needs in retirement.
- Consumer Protections: The federally regulated program includes mandatory counseling to help borrowers make informed decisions.
HECM Cons
- Higher Upfront Costs: HECMs have an upfront mortgage insurance premium (MIP) that can be significant, although it is typically financed into the loan.
- Age Restriction: You must be at least 62 to qualify.
- Lower Loan Limits: The FHA maximum claim amount means less borrowing power for high-value homes compared to proprietary loans.
Proprietary Reverse Mortgage Pros
- Higher Loan Amounts: Ideal for owners of high-value homes who need more cash than the HECM limit allows.
- Lower Age Limits: Some proprietary loans allow borrowers as young as 55.
Proprietary Reverse Mortgage Cons
- No Federal Insurance: These loans do not have the same non-recourse protection as HECMs, potentially exposing the estate to greater liability.
- Varying Terms: Terms, rates, and fees are set by the private lenders, which can lead to higher interest rates and less consumer protection.
Single-Purpose Reverse Mortgage Pros
- Low Cost: These are typically the least expensive option due to low or no closing costs.
- Minimal Impact: Since funds are restricted, they may not impact eligibility for certain government benefits.
Single-Purpose Reverse Mortgage Cons
- Limited Use: You cannot use the funds for general living expenses, only for the approved purpose.
- Limited Availability: These programs are not available in all areas and may have income requirements.
How to Choose the Right Reverse Mortgage for You
- Assess Your Needs and Goals: Do you need a large lump sum for a specific project, ongoing income, or a line of credit for emergencies? Your goals will help determine which type of reverse mortgage best suits you.
- Evaluate Your Eligibility: Check if you meet the minimum age and equity requirements for each type of loan. If you are under 62, a proprietary mortgage might be your only option.
- Mandatory Counseling: For an HECM, counseling is a crucial step. Use it as an opportunity to ask questions and fully understand the process, costs, and implications. Find a HUD-approved counselor at consumerfinance.gov/consumer-tools/reverse-mortgages/answers/key-terms/.
- Compare Costs and Terms: Shop around and compare offers from multiple lenders. While some HECM costs are standardized, interest rates and fees can vary. Be especially diligent when comparing proprietary loans.
- Consider Your Heirs: Understand how a reverse mortgage impacts your heirs. With an HECM, the FHA insurance protects them from owing more than the home's value, but this might not be the case with proprietary loans.
Conclusion
To answer what is the difference between a HECM mortgage and a reverse mortgage?, the key distinction lies in federal backing. All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. The HECM is the FHA-insured, most widely used product, offering robust consumer protections like mandatory counseling and non-recourse features. Proprietary and single-purpose reverse mortgages offer alternatives with different age requirements, loan limits, and costs. Understanding these differences is essential for making an informed decision that aligns with your financial security in retirement.
