What is a Proprietary Reverse Mortgage
A proprietary reverse mortgage is a loan that lets senior homeowners retrieve the equity in their homes through a private company. Proprietary reverse mortgages are not widely available and make up a small percentage of the reverse mortgage market. Home equity conversion mortgages (HECMs), which are insured and tightly regulated by the federal government, make up the bulk of the reverse mortgage market.
BREAKING DOWN Proprietary Reverse Mortgage
Proprietary reverse mortgages allow lenders to establish their own terms since these mortgages aren’t federally insured. One of the most important terms is the loan amount. While HECMs are limited to the lesser of the home’s appraised value or $679,650 as of January 2018, proprietary reverse mortgages are only limited to the amount of risk the lender is willing to take on. This amount will still be based on the home’s appraised value, but it can be in the millions. For this reason, proprietary reverse mortgages are sometimes called jumbo reverse mortgages, and they are primarily geared toward seniors whose homes are worth more than the government’s limit.
Because proprietary reverse mortgages are not federally insured, they do not have up-front or monthly mortgage insurance premiums. While the homeowner doesn't have to pay anything on a reverse mortgage until it is due, the monthly premiums reduce the amount the homeowner can borrow.
Pros and Cons of a Proprietary Reverse Mortgage
It might seem that a proprietary reverse mortgage would be a better deal than an HECM, but lenders may charge higher interest rates and lend less relative to the home’s value to make up for the lack of mortgage insurance.
If you’re considering a proprietary reverse mortgage, you should not only compare interest rates and fees from several proprietary reverse mortgage lenders; you should compare those quotes against several HECM quotes to see which option gives you the best deal. Your age and how far above HECM limits your home’s value is influence which one will be the better deal, too. Also consider alternatives like home-equity loans and lines of credit.
Unlike a single-purpose reverse mortgage, the proceeds of a proprietary reverse mortgage can be used for anything, including paying off the homeowner’s existing mortgage to free up monthly cash flow. And unlike HECMs, proprietary reverse mortgages do not restrict the amount of proceeds borrowers can receive in the first year of the reverse mortgage term. Instead, borrowers can usually obtain all the loan proceeds up front, though a line of credit is another possibility.
These loans also don’t require borrowers to get mortgage counseling before taking them out, though counseling is inexpensive and might still be a good idea. They can have features that other reverse mortgages don’t, such as equity-sharing provisions, also called shared-appreciation provisions. In every way, the proprietary reverse mortgage is the least restrictive of the three types of reverse mortgages. However, the fees are less tightly regulated than HECM fees and proprietary loans may not have the same non-borrowing spouse protections that HECMs offer.
Proprietary reverse mortgages vanished after the housing bubble burst, then became available again when home prices rebounded. Still, they aren’t nearly as common as HECMs because there isn’t much of a secondary market for lenders to sell proprietary reverse mortgages. They don’t offer easy securitization like regular mortgages that are sold to Fannie Mae and Freddie Mac do, so lenders keep proprietary reverse mortgages in their own portfolios or sell them to non-government investors.