If you’ve ever seen an advertisement for reverse mortgages, odds are it involved a Home-Equity Conversion Mortgage (HECM). These federally insured loan products allow homeowners who are at least 62 years old to convert home equity into cash to pay for things such as basic living expenses, healthcare costs or a home remodel. While HECMs represent the bulk of the reverse-mortgage market, a small segment – less than 10% – includes two other types: “single-purpose reverse mortgages” and “proprietary reverse mortgages.” So, why might someone benefit from getting a single-purpose reverse mortgage instead of the usual HECM?
Single-purpose reverse mortgages, also known as property-tax deferral programs and deferred payment loans, allow homeowners to access part of their home’s equity to pay for a lender-approved expense – typically property taxes and necessary home repairs. They provide a one-time lump-sum advance.
As with standard HECMs, single-purpose reverse mortgages are not installment loans that you repay with monthly payments. Instead, the entire loan becomes due when you sell the home, move to another primary residence or assisted-living facility for longer than 12 months, or die. (Repayment may also be triggered if you stop paying homeowner’s insurance or if the home falls into disrepair and/or is condemned by the city.)
In general, single-purpose reverse mortgages are made available to moderate-to-low-income homeowners who need help paying for smaller, but crucial expenses such as property taxes and home repairs. In many cases the homeowner may have no other means of covering these expenses, so the single-purpose reverse mortgage can serve an important role in the homeowner’s financial well-being. Unlike traditional HECMs, homeowners can’t use single-purpose reverse mortgages to pay for, say, living expenses, medical bills or a vacation. The funds are always used for a specific, lender-approved reason.
Single-purpose reverse mortgages tend to be less expensive than other loan products, which is great news if you’re cash-strapped to begin with. One reason for this is that only a small amount of the home’s equity is tapped, which makes the loan less risky to the lender.
These loans generally have no origination fees, no insurance premiums, minimal closing costs (if any) and very low interest rate. In many cases interest is charged on a fixed basis, so the rate will never change. Another perk: The interest may be “simple” rather than “compound” interest, which means you won’t pay interest on interest.
If you’re an older homeowner who needs help paying for property taxes or necessary home repairs, a single-purpose reverse mortgage may be a good option. As these loans aren’t available everywhere – and they go by different names – they can be difficult to track down. Still, it can be worth the effort: Single-purpose reverse mortgages typically are a very low-cost option and, in most cases, no repayment is required as long as you live in your home.
Article By: Rick Underwood
Written: 3/11/2019
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