Home-equity conversion mortgages (HECMs) 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. It lets them pay for basic living expenses, healthcare costs, a home remodel, or anything else.
While HECMs represent most of the reverse-mortgage market, a small segment 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.
- Proprietary reverse mortgages provide larger loan amounts than permitted under home-equity conversion mortgage (HECM) programs.
- The largest loan amount allowed for a HECM was $765,600 in 2020.
- Like HECMs, proprietary reverse mortgages only allow borrowing a fraction of home equity, often around 50%.
- Unlike HECMs, it is usually necessary to get the funds from a proprietary reverse mortgage as a lump sum rather than spread out as monthly payments.
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, 2020, the amount increased to $765,600.
Proprietary reverse mortgages provide larger loan amounts than permitted under HECM programs. HECMs are federally backed and can be offered by any lender approved by the Federal Housing Administration (FHA), so they must abide by federal limits. However, proprietary reverse mortgages are structured and insured by private companies.
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 home's appraised value. 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. The funds can be used for living expenses, travel, medical expenses, long-term care, or remodeling a home. The only reverse mortgage products that limit how funds are used are single-purpose reverse mortgages. They are typically used to help homeowners pay for property taxes and necessary home repairs.
Finally, unlike HECMs, propriety reverse mortgages may not offer multiple disbursement options, 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 the HECM upper limit of $765,600, 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 your home's value.
Proprietary reverse mortgages, like HECMs, typically only allow you to tap into a portion of your home’s equity. For instance, you may be able to borrow up to $3 million if your home is valued at $6 million.
Proprietary reverse mortgages involve substantial costs, so it may make more financial sense to sell houses that are too high-priced for HECMs. By selling, you can save even more by downsizing to a smaller home or free up extra cash for travel and other luxuries.
Proprietary reverse mortgages aren’t federally insured, so there are no upfront mortgage insurance (UFMI) fees or monthly mortgage insurance premiums (as there are 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. Thus, it is a good idea to compare interest rates and fees from several proprietary reverse mortgage lenders and HECM lenders. That helps you 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. However, some homeowners may find that a proprietary reverse mortgage allows them to borrow more against their home equity. How much you can borrow depends on your age and the value of the property, as well as 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 reverse mortgages. While you may not be required to meet with a counselor if you’re seeking a proprietary reverse mortgage, it can still be helpful. It can help you learn more about how reverse mortgages work, including costs, tax implications, benefits, and downsides.