Reverse Mortgages Versus HECMs: Is There a Difference?

*Collaborative Post*

When you retire, whole new worlds open up to you. One of those worlds is the world of home mortgages. As long as you are a home-owning adult, you can get a standard home mortgage, but you have to be an adult to get a proprietary reverse mortgage or an HECM. If you are interested in one or the other, it is important to understand how they work and what the differences are between them.

The Basics of What a Reverse Mortgage or HECM Is

An HECM is a home equity conversion mortgage. In some ways, it is nearly identical to what you might consider a regular reverse mortgage. Both offer you the opportunity to borrow money without paying it back for a long time, unlike a standard home mortgage you have to pay back relatively quickly.

What an HECM is and How it Works

The biggest difference between what you might think of as a regular reverse loan and an HECM is an HECM is offered by the government. Therefore, an HECM reverse loan features an assurance from the government that the loan will be insured. HECMs are also governed by strict federal guidelines designed to protect you.

What a Proprietary Reverse Mortgage is and How it Works

A proprietary reverse mortgage is simply one offered by a non-government source. For example, you might get a proprietary reverse loan from the bank in your town. There are some advantages to that. For example, you may have done business with that institution before. There may also be a special deal in place you can take advantage of if you do multiple types of business with the institution.

The downside of a proprietary reverse mortgage is it is subject to whatever rules the lender decides to set, at least to a degree. Federally issued lending caps still apply. However, there is no government-offered protective guarantee. It is up to you to thoroughly read the rules established by a private lender and make sure you are agreeable to all aspects of the contract before you sign it.

Another Related Mortgage Option to Consider

Reverse mortgage options also split into types. You can apply for a regular reverse loan or select a jumbo loan for a larger home. Jumbo loans are subject to similar rules but allow you to borrow extra money. That way you can get the most out of your home’s value.

Reverse Mortgage Borrowing Specifics

When you apply for any such loan, the borrowing specifics are similar. You are typically given the option to collect all available funds at once or have them divided into equal payments sent to you over the course of many months. Credit line creation is also a possibility. That allows you to avoid borrowing money except when you need it for a specific purpose.

Repayment of a Reverse Mortgage

Since you never have a specific loan period with a reverse loan, you might wonder how the lender decides when you have to repay it. The answer is you do not actually have to repay it, unless you want to. Repayment is truly optional because, if you never repay, the home is simply sold when you stop living in it. The lender is given all proceeds up to the amount you still owe.

How to Choose Your Mortgage Type

With all of those mortgage options, you might be confused about how to pick. The size, age and general value of your home will certainly influence your decision. You also have to decide for yourself if you prefer the security of working with a government lender or like the option of doing business locally. If you truly cannot make up your mind alone, seek the assistance of a third party expert in reverse mortgages who can provide unbiased advice.

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