Single-Purpose Reverse Mortgage

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Single-Purpose Reverse Mortgage

What Is a Single-Purpose Reverse Mortgage?

Lenders offer payments to borrowers under a single-purpose reverse mortgage in return for a percentage of the borrower’s home equity. The lender has given the borrower precise instructions on how to spend these payments.

These may be compared to home equity conversion mortgages and proprietary reverse mortgages (HECMs).

Key Takeaways

  • For seniors 62 and over, a reverse mortgage is a sort of loan that enables homeowners to turn a portion of their home value into cash income.
  • In a single-use reverse mortgage, borrowers are required to spend these payments for a single, pre-approved use.
  • These lump-sum loans are particularly useful for covering expenses like property taxes, house maintenance, insurance premiums, and other regular payments that are in the lender’s best interest.
  • Single-purpose loans are likewise tougher to get, although other reverse mortgage kinds are less constrained but more expensive.

Understanding Single-Purpose Reverse Mortgages

Homeowners 62 years of age and older have the option to use a single-purpose reverse mortgage to convert their home equity into a reliable income stream in retirement. As with any reverse mortgage, lenders advance borrowers money from the equity in their homes. The sale of the house would potentially cover the loan payback since the lender bases the loan’s instalments on the borrower’s existing equity. However, lenders often anticipate repayment when the borrower vacates the property or dies away.

Reverse mortgages with a single use restrict the uses that borrowers may make of their payments. For instance, lenders might stipulate that money be used for house maintenance and upkeep or to pay for regular expenses that are in their best interests, such homeowners insurance or property taxes. Due to their simpler application processes and cheaper interest rates compared to other reverse mortgage kinds, they are often preferred by borrowers.

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On the other side, it could be difficult for borrowers to identify lenders that provide these kinds of loans. These loans are less expensive than others that are general purpose since these purposes are designed to feed back into the house itself or its care, maintaining the collateral for the lender.

The majority of single-purpose reverse mortgages are provided by nonprofit organizations and governmental bodies.

The older borrowers who have paid off their houses and want a reliable income stream are often the ones who benefit the most from reverse mortgages. When obtaining a reverse mortgage, homeowners keep the title to their house. Government agencies do not classify payments as income since they are an advance on equity, thus they do not raise the borrower’s tax liability or typically have an impact on their eligibility for benefits from Social Security or Medicare.

Other Types of Reverse Mortgages

The most popular kind of reverse mortgage, known as a home equity conversion mortgage, is insured by the U.S. Department of Housing and Urban Development (HUD) (HECMs).The money received from these reverse mortgages may be used whatever the borrower pleases. The amount that borrowers may get via a home equity conversion mortgage is still subject to HUD regulations. Before submitting an application for a home equity conversion mortgage, HUD mandates that potential borrowers consult with a counselor working for a separate housing counseling organization.

Some financial institutions provide proprietary reverse mortgages, which are privately backed loans, for homeowners with more costly properties who want to be eligible for larger payments. Going directly to lenders allows borrowers looking for these reverse mortgages to avoid paying the fee associated with meeting with a counselor, but the Federal Trade Commission (FTC) cautions those customers to shop carefully, compare the advice from various lenders, and be wary of high-pressure sales pitches or hidden fees.

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The Bottom Line

In comparison to the more popular HECMs and proprietary reverse mortgages, single-purpose reverse mortgages feature cheaper costs and better rates. They are often exclusively granted by nonprofit organizations or local government bodies, and they are offered for particular purposes like paying property taxes or fixing a roof. They are a terrific alternative for receiving the money you need to remain in your house in retirement if you can discover one and be accepted for one.

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