Chances are, if you’ve ever seen a reverse mortgage commercial, it included a home equity conversion mortgage (HECM).Homeowners who are at least 62 years old may use these federally guaranteed loan products to turn their home equity into cash to pay for things like essential living expenditures, medical bills, or house renovations.
The majority of reverse mortgages are HECMs, however there is also a minor subset that consists of proprietary and single-purpose reverse mortgages. A single-purpose reverse mortgage may be more advantageous than a HECM in certain circumstances.
- A reverse mortgage is a form of loan that enables homeowners to turn part of their home equity into cash income if they are 62 years of age or older.
- In a single-use reverse mortgage, borrowers are required to spend these payments for an agreed-upon defined purpose.
- These lump-sum loans may be utilized, in example, to cover home maintenance costs and property taxes.
- Single-purpose reverse mortgage costs are often cheaper than those of comparable products, but finding a lender that offers them could be more difficult.
What Is a Single-Purpose Reverse Mortgage?
With a single-purpose reverse mortgage, homeowners who are 62 years of age or older may access some of the equity in their house to cover an obligation that the lender has authorized, generally property taxes and essential home repairs. They provide an upfront lump amount payment. The majority of single-purpose reverse mortgages are granted by nonprofit organizations and state and local governmental bodies.
Single-purpose reverse mortgages are not installment loans that you pay back with monthly installments, as normal HECMs are. Instead, the whole amount of the loan is payable when you sell the property, move to a different principal residence (including an assisted care facility), or pass away.
Repayment could also start if you stop paying your homeowners insurance, the house starts to break apart, and/or the city condemns it.
Why Get a Single-Purpose Reverse Mortgage?
Single-purpose reverse mortgages are often made accessible to homeowners with low to moderate incomes who need assistance with lesser but essential costs like property taxes and house maintenance. The homeowner may not always have any other way to pay for these costs, therefore the single-purpose reverse mortgage might be crucial to the homeowner’s financial stability.
Single-purpose reverse mortgages, unlike conventional HECMs, cannot be used by homeowners to cover expenditures such as living costs, medical costs, or travel. The money is always put to a specified, authorized use by the lender.
These are often simpler for borrowers to get and have lower interest rates than other reverse mortgages because of their exclusive emphasis on the house itself. On the other side, it could be difficult for borrowers to identify lenders that provide these kinds of loans.
Costs for a Single-Purpose Reverse Mortgage
As previously indicated, single-purpose reverse mortgages often cost less than other comparable loan products, which is excellent news if you already have a tight budget. One explanation for this is because just a tiny portion of the home equity is used, which reduces the lender’s risk associated with the loan.
These loans often have no origination fees, little closing expenses, no insurance premiums, and relatively cheap interest rates. Many times, interest is levied at a set rate, guaranteeing that the rates won’t ever increase. Another benefit is that simple interest loans often have lower total payments over the course of the term than do compound interest loans since you won’t be paying interest on interest.
It is forbidden to discriminate in mortgage financing. There are actions you may take if you believe that you have experienced discrimination because of your race, color, religion, sex, age, national origin, marital status, family situation, use of public assistance, or handicap. Making a report to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development is one of these steps (HUD).
Researching Your Options
Finding a single-purpose reverse mortgage might be difficult, despite the fact that obtaining a normal HECM is sometimes straightforward. That’s because not all places have them. To assist you pay for home repairs and property taxes, many state and local governments, nonprofit organizations, and credit unions all provide some sort of single-purpose reverse mortgage.
To learn more about such programs in your region, the personnel at your local Area Agency on Aging should be contacted, according to the Federal Trade Commission’s Consumer Advice website. To locate the closest Agency on Aging, go to eldercare.gov (or dial 1-800-677-1116), and be sure to inquire about “loan or grant programs for home repairs and upgrades,” “delayed payment loans,” or “property tax deferral programs.”
Contacting the local government to which you pay your taxes is another way to learn about available programs if you need assistance paying them. You ought should be able to find out whether there are programs available in your region, as well as learn more about how each one operates and the requirements for enrollment.
If a single-purpose reverse mortgage is not available in your region, you may want to think about getting a home equity loan or a home equity line of credit (HELOC).However, you must fulfill minimum debt-to-income and credit score requirements, which may be challenging if you’re retired and on a fixed income. The fact that there are no monthly loan payments for the single-purpose reverse mortgage is another of its main advantages. That won’t be the case if you get a HELOC or a home equity loan instead.
Are single-purpose reverse mortgages riskier?
Although all loan products include some risk, single-purpose reverse mortgages may be less dangerous than more conventional home equity conversion mortgages since they often feature fewer fees and more advantageous terms and interest rates (HECMs).
For whom is a single-purpose reverse mortgage ideal?
For someone who needs a certain amount of money for a particular reason (such as paying property taxes or making repairs to their roof), but who is ineligible for other loan products or programs, a single-purpose reverse mortgage may be the best option. Before applying for a single-purpose reverse mortgage, prospective borrowers should check with the local office of the aging services administration to determine whether they qualify for home repair assistance or a reduction in their property taxes.
Who should not get a single-purpose reverse mortgage?
A single-purpose reverse mortgage should not be obtained by those who have enough cash on hand to satisfy their needs or who want to transfer their house to their heirs free and clear.
What happens to a single-purpose reverse mortgage when I die?
Your single-purpose reverse mortgage would need to be repaid after you die away by whomever gets your house. By spending their own money or applying for a loan product in their own names, such a HELOC or a mortgage that would pay off the single-purpose reverse mortgage, is the most typical method that individuals achieve this.
The Bottom Line
A single-purpose reverse mortgage can be a smart choice if you’re an older homeowner who needs assistance with paying your property taxes or critical house maintenance. These loans might be challenging to locate since they aren’t offered everywhere.
Even so, the effort could be worthwhile. Reverse mortgages with only one purpose are often a relatively affordable choice. As long as you continue to reside in your house, there is often no payments obligation.
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