You not only need to think twice about taking out a reverse mortgage loan; you also need to think hard about which type of reverse mortgage and which method of disbursement option to choose.
The nation’s largest lenders are offering at least four types of reverse mortgage loans:
- Variable-Rate Reverse Mortgage Loan
With this type, you can choose an interest rate that changes monthly or yearly. This fits you if you prefer flexibility in rate adjustments and in disbursement of loan proceeds. This type is backed by the Federal Housing Administration (FHA) with certain loan amount limits.
- Fixed-Rate Reverse Mortgage Loan
The interest rate for this type of loan doesn’t change over the entire life of the loan. This fits you if you’re more comfortable with a stable interest rate, unaffected by fluctuations and various events in the market. The loan proceeds will be provided to you in lump sum at closing and, as you repay portions of your loan, you cannot redraw funds or a portion of funds that you have repaid. This is also backed by the FHA with certain loan amount caps.
- Reverse Mortgage Loan for Home Purchase
This type is for you if you want to relocate or want to move to a new home, but you don’t want to use a conventional mortgage to buy a home. You can use the loan proceeds to buy your new home without having to make the monthly payments as required in conventional loans. You, however, will be required to repay immediately the reverse mortgage loan if you don’t live in your new home, if you don’t pay your residential real estate tax and home insurance or you don’t maintain the property according to FHA standards. This loan is also backed by the FHA with certain caps.
- Proprietary Reverse Mortgage Loan
This loan type is not backed by the FHA and it’s designed by lenders for borrowers looking for features not backed by FHA. It’s also exclusive to the bank offering the proprietary loan. Typically, these loans are offered to homes of higher values.
In many cases, reverse mortgage loans are called home equity conversion mortgage (HECM) loans. They’re different from typical home equity loans because they’re only offered to homeowners aged 62 or older, who have been occupying their homes as their primary residences, and who have paid a substantial percentage of their mortgages. Reverse mortgage borrowers also don’t need to pass certain income and credit qualifications.
There are also at least five ways to receive the proceeds of the reverse mortgage loan:
1. Lump Sum Payment
You receive the entire proceeds of the loan after closing.
2. Line of Credit
You withdraw only the amount you need at frequencies and dates you desire until you exhaust your allotted loan amount.
3. Monthly Installments
You receive a fixed amount of money every month for as long as you live, subject to compliance with residence, tax and insurance requirements.
4. Scheduled Monthly Payments over a Fixed Period of Time
5. Combination of Line of Credit and Monthly Installments
With these available options, you can choose which one best serves your needs during your retirement.