Home-equity conversion mortgages – or HECMs, as they’re commonly called – are the most well known of the reverse mortgage products. These federally insured loans allow homeowners who are at least 62 years old to tap into their home equity to pay for things such as basic living expenses, healthcare costs and a home remodel. While HECMs represent most of the reverse-mortgage market, a small segment – less than 10% – includes two other loan products: proprietary reverse mortgages and single-purpose reverse mortgages. This article explains who might want to use a proprietary reverse mortgage.
What Is a Proprietary Reverse Mortgage?
The U.S. Department of Housing and Urban Development sets the maximum loan amount for HECMs. Effective Jan. 1, 2018, the amount increased to $679,650 (150% of the Freddie Mac national conforming limit of $453,100). This maximum also applies to areas that receive exceptions to Freddie Mac limits, including Alaska, Hawaii, Guam and the U.S. Virgin Islands.
Proprietary reverse mortgages provide larger loan amounts than permitted under HECM programs. That’s because while HECMs are federally backed and can be offered by any lender approved by the Federal Housing Administration, proprietary reverse mortgages are structured and insured by private companies, which also choose the lenders that can offer them.
Size-wise, proprietary reverse mortgages are limited only by the amount of risk the lender is willing to assume. As with HECMs, the loan amount is based on several factors, including the appraised value of the home, but, unlike HECMs, the loan can be in the millions. As a result, proprietary reverse mortgages are also called jumbo reverse mortgages.
Both HECMs and proprietary reverse mortgages permit borrowers to spend the funds in any manner they wish, whether it’s for living expenses, travel, medical expenses, long-term care, a home remodel or a dream vacation. The only reverse mortgage product that limits how funds are used is the single-purpose reverse mortgage, which is typically used to help homeowners pay for property taxes and necessary home repairs.
Finally, unlike HECMs, propriety reverse mortgages may not offer multiple options for disbursement, such as a monthly payment or line of credit. Instead, the funds are usually available only as a lump sum at closing.
Costs of Proprietary Reverse Mortgages
If you live in a home worth more than $679,650 – the upper limit for HECM programs – you may qualify for a larger loan amount with a proprietary reverse mortgage. The size of the loan you receive depends on several factors, including your age and the value of your home. Typically, proprietary reverse mortgages, like HECMs, allow you to tap into a portion of your home’s equity – not the entire amount. For example, if your home is valued at $6 million, you may be able to borrow up to $3 million.
Proprietary reverse mortgages aren’t federally insured, so there’s no upfront or monthly mortgage insurance premium (as there is for HECMs). Still, lenders tend to charge higher interest rates and lend lower amounts relative to a home’s value to compensate for the lack of mortgage insurance. As such, a proprietary reverse mortgage won’t always be the best fit for a homeowner – even one with an expensive home. It’s a good idea to compare interest rates and fees from several proprietary reverse mortgage lenders and HECM lenders alike to find the best deal based on your age and home value.
The Bottom Line
If you’re an older homeowner, you may be able to tap into your home’s equity with a reverse mortgage to pay for living expenses, a home remodel or any other expense. The most common type of reverse mortgage by far is the HECM, but certain homeowners may find that a proprietary reverse mortgage allows them to borrow more against their home’s equity. How much you can borrow depends on your age and the value of the property – and how much risk the lender is willing to take on.
If you are considering a HECM, you must receive counseling from a government-approved agency that will help you evaluate the pros and cons of whether a reverse mortgage makes sense for you. While you may not be required to meet with a counselor if you’re seeking a proprietary reverse mortgage, it can still be helpful, because you’ll learn more about how reverse mortgages work, including costs, tax implications, benefits and downsides. (For more, see Find the Right Reverse Mortgage Counseling Agency.)
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A Guide to Taxes and Reverse Mortgages
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A look at Regulation of Reverse Mortgages
Rules For Obtaining an FHA Reverse Mortgage
Find the Right Reverse Mortgage Counseling Agency
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When to Get a Single-Purpose Reverse Mortgage