Types of Reverse Mortgages
There are 3 basic types of Reverse Mortgages with some variations on the same theme.Type 1: The FHA/HUD Insured Reverse Mortgage.
The HECM (Home Equity Conversion Mortgage) is the only reverse mortgage insured by the federal government. These loans are insured by the FHA (Federal Housing Administration), which is part of the U. S. HUD (Department of Housing and Urban Development).
The FHA tells HECM lenders how much they can lend you, based on your age and home value. The HECM program limits your loan costs, and the FHA guarantees that lenders will meet their obligations.
Ninety percent of all reverse mortgages are granted using this option. A vast majority of these are funded using the HUD monthly plan. This plan has an interest rate that floats at 1.50% above the one-year Treasury Index. The annual plan floats at 3.10% above the same index. With a lower interest rate, the monthly plan means a higher benefit for the senior, so it is by far the most popular.
Type 2: The Fannie Mae "Homekeeper".
Fannie Mae, America’s largest loan funder, offers reverse mortgage loans that are modeled after the HECM. Their Home Keeper mortgage program has lower closing costs than the HUD/FHA programs and slightly higher loan limits. There is no credit line growth rate as there is with the HUD/FHA options. The Home Keeper loans may benefit older seniors in some lower cost areas.
Type 3: The Jumbo Cash Accounts
The type of account is a relatively new entry into the reverse mortgage arena. This is an institutionally funded reverse mortgage intended for use by seniors with properties worth at least $750,000.00. A unique feature of the Cash Account products is that there is virtually no maximum home value or loan amount. As with the HECM and the Home Keeper products, the benefit is a function of the home value and age with no income qualification.
The Cash Account products are designed to encourage the senior to take a substantial cash advance at closing. The program is available in three variations: Credit Line Option, Cash Out Option, and Combo Option. There is no provision for guaranteed monthly income. All variations offer an Equity Choice feature that enables borrowers to protect 10% to 50% of their home equity.
The effective rate of interest is higher than either the Fannie Mae Home Keeper mortgage or either of the HUD/FHA varieties. With the Cash Out Option there are no closing costs.
