How Reverse Mortgages Work

Different Types of Reverse Mortgages

Fannie Mae is the investor in two reverse mortgage programs, HUD's HECM and Fannie Mae's Home Keeper reverse mortgage.
Fannie Mae is the investor in two reverse mortgage programs, HUD's HECM and Fannie Mae's Home Keeper reverse mortgage.
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There are three different types of reverse mortgages:

  • Single-Purpose Reverse Mortgages are sometimes offered by nonprofit groups or local or state governments. As the name implies, the funds are often limited to a single purpose, such as home renovation or property taxes. Additionally, homeowners must qualify with certain income restrictions. An advantage to this type of loan is often its lower initial cost.
  • Proprietary Reverse Mortgages are tied to private companies that maintain ownership of the loans. The companies choose specific lenders to administer the mortgages. With fewer qualifying restrictions, these loans usually come with substantial upfront fees, such as appraisals, credit reports, origination fees and closing costs. A monthly service fee is also usually charged.
  • Home Equity Conversion Mortgages (HECMs) have become the most popular form of reverse mortgage since their introduction in 1987 [source: Munnell]. These loans, insured by the Federal Housing Administration, are the only reverse mortgages guaranteed by the government to deliver what the loan promises.

In general, you must be at least 62 years of age and occupy the home as your principal residence in order to qualify for a reverse mortgage. You must own your home outright or have a minimal mortgage balance that you can pay off with proceeds from the loan. For most federally insured reverse mortgages, your dwelling must be a single-family home or a two- to four-unit property that you own and occupy. In some cases, townhouses, condominium units and manufactured homes are eligible, too.

The amount of cash you could receive depends on a number of factors, including your age, where your house is located and what it's worth. You may also choose to receive the cash in a lump-sum advance, a credit line account or a fixed monthly loan advance that you receive as long as you stay in your home.

The AARP provides a reverse mortgage calculator to help you calculate and compare approximate estimates for two nationally available reverse mortgage programs.

For most people, their home is their largest financial asset, and obtaining a reverse mortgage is a big step. On the next page, we'll take a look at reasons the reverse mortgage has grown in popularity -- and some of the risks involved.