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Reverse mortgages offer a way to turn your home equity into liquid cash in a lump sum, on a monthly basis, or in a line of credit. For many who struggle with a fixed income, reverse mortgages can provide breathing room financially while still allowing you to stay in your home. The concept of a reverse mortgage is relatively simple, but three different types are available, depending on your income level. Homeowners looking to borrow a lot of money with more flexibility might consider proprietary reverse mortgages since these have few regulations. Home equity conversion mortgages (HECMs) offer homeowners more financial protection, and you must go through an FHA-accredited lender to get the loan.
Key Takeaways
- Proprietary reverse mortgages offer the ability to borrow larger amounts of money with fewer regulations.
- Home equity conversion mortgages (HECMs) provide more protection for homeowners.
- You must use a Federal Housing Administration (FHA)-accredited lender for an HECM.
- A proprietary reverse mortgage has lower upfront costs, but overall costs are lower with an HECM.
How a Reverse Mortgage Works
A reverse mortgage is a loan that borrows against the equity in a home. Reverse mortgages are only available for borrowers over age 62 with substantial home equity. After applying, the money borrowed is paid to the homeowner through a lump sum, a monthly installment, or a line of credit.
The homeowner must be able to stay up to date on all property taxes and keep the house in good repair. The loan is repaid when the homeowner dies, sells the house, or moves out for more than 12 consecutive months. After they’ve vacated the house for one of these reasons, the house is sold, and the proceeds from the sale pay the lender for the amount borrowed plus interest charges and service fees.
How an HECM Works
Home equity conversion mortgages (HECMs), also known as Federal Housing Administration (FHA) reverse mortgages for older adults, are reverse mortgages that the FHA backs. That link to the government comes with more regulations but also with a measure of safety for you.
Since HECMs are insured by the FHA, they can be offered only by an FHA-approved lender. They also require every borrower to attend a United States Department of Housing and Urban Development (HUD) mortgage counseling session, where an advisor can help show how the HECM will impact the borrower’s financial life. This helps cut down on mortgage scams, which can be a big problem.
The standards for an HECM are simple:
- You must be age 62 or older.
- You must occupy the house, condo, or multifamily unit as your primary residence.
- You must have considerable equity—generally interpreted to mean 50% or more.
- You must be able to pay your property taxes and homeowners insurance and maintain the home.
- You must not be delinquent on any federal debt.
HECM amounts are based on your equity and age, the current interest rate, and the lesser of the appraised value or the mortgage limit of $1,149,825. This keeps people from borrowing far too much and ending up underwater on their mortgage.
The one drawback of an HECM is that there are additional fees. HECMs are considered non-recourse loans, meaning that even if you borrow more than your available equity, the lender cannot force you to move. To help protect lenders, each HECM is subject to up-front mortgage insurance premiums of 2% of the total loan at the time of closing, and over the life of the loan, you’ll need to pay an annual mortgage insurance premium of 0.5% of the outstanding mortgage balance.
HECMs also require origination fees, such as title fees, appraisals, and other necessary costs for loan closing. Any service fees are capped at $35 per month.
How a Proprietary or Jumbo Reverse Mortgage Works
A proprietary or jumbo reverse mortgage may be best for those with higher-value homes. Since an HECM has a cap on the amount you can borrow, those who are house rich may want to tap more than the allowed amount. A proprietary reverse mortgage can exceed the FHA limit, although it will seldom come close to borrowing your full equity amount.
Since the FHA doesn’t back proprietary reverse mortgages, they aren’t subject to FHA regulations, such as mandatory counseling sessions or upfront and ongoing mortgage insurance payments. While this may seem like a good thing, it also strips away the layer of protection for older adults. Mortgage lenders who might not qualify for FHA backing can offer proprietary reverse mortgages.
Proprietary reverse mortgages also tend to have lower upfront costs than HECMs. Eliminating mortgage insurance is a big part of this. However, HECMs tend to have lower interest rates than proprietary reverse mortgages. You’ll need to do the math to determine which is a more cost-effective option for your specific situation.
Important
Most proprietary reverse mortgages offer payment in a lump sum at closing only. If you want monthly installments, an HECM is the better choice.
Are Proprietary Reverse Mortgages Susceptible to Scams?
There are plenty of reliable companies offering jumbo reverse mortgages. However, since there is no requirement for mortgage counseling or Federal Housing Administration (FHA) backing for the lender, they are more susceptible to scams. Since more valuable homes are on the chopping block, there’s more incentive to persuade older adults to consider proprietary reverse mortgages.
Is There an Age Limit for Proprietary Reverse Mortgages?
Yes. The broad standard for proprietary reverse mortgages is age 62, just like home equity conversion mortgages (HECMs). However, some companies offer them starting at age 60 or even lower. Check with the mortgage lender to find the age limit in your state.
Is There a Limit on How I Use My Proprietary Reverse Mortgage Funds?
No. You can use your jumbo reverse mortgage funds to pay off the current mortgage, pay for home repairs, consolidate debt, or even take a vacation. Keep in mind that the money borrowed will still need to be repaid when you sell the home or pass away, at which point your heirs will need to sell the house or repay the loan out of other funds.
The Bottom Line
While HECMs and proprietary reverse mortgages both offer the ability to borrow against your equity, HECMs do so with more protections in place for you. HECMs are also much more common than proprietary reverse mortgages, so finding the right lender for a jumbo reverse mortgage might be more difficult. If you have a high-value home and need a significant amount of money, a jumbo reverse mortgage may be your only option. Just remember, you should still speak with a trusted advisor about the pros and cons of each type of reverse mortgage.