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Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Proprietary Reverse Mortgages: New Options for Homeowners

proprietary reverse mortgageReverse mortgages have gained popularity over the years thanks to television ads and other various media forums. In fact, Tom Selleck is among the latest celebs to pitch federally insured reverse mortgages. Selleck talks about how you can turn your home equity into cash and not pay anything back -- no principal, interest or fees -- until years after your retirement.

Home equity line of credit (HELOC) vs reverse mortgage

For older homeowners (at least age 52) who are short on cash, aside from selling their home, there are generally four basic ways to access the equity in their home.

  1. Cash-out refinance
  2. Home equity line of credit
  3. Home equity loan, or
  4. Federally-insured Home Equity Conversion Mortgage (HECM)

All of these methods involve turning your home equity into cash. The cash can be helpful for regular bills, living expenses, loans to family members or practically any other need.

Among the four options mentioned above, let's compare the most popular options -- a HELOC and a reverse mortgage.

Any type of home equity loan, whether it's a line of credit or a fixed rate home equity loan, is essentially a "second mortgage." Assuming you have the equity in your home, you can tap into your home's equity and pull cash out via a home equity loan or line. You then pay back that money through regular installments over a specified period of time.

Reverse mortgages, on the other hand, are unlike home equity loans. Funds received from a reverse mortgage don't need to be paid back in monthly installments. Instead, the homeowner isn't responsible for the amount borrowed until they pass away, sell their home or move permanently to another home.

The income from a reverse mortgage can be accessed either through a lump-sum or through regular monthly installments.

When determining which option makes the most sense for you, generally it comes down to three things.

  1. Cost of borrowing. Although homeowners do not pay interest on the money they receive from a reverse mortgage, the cost of borrowing is typically higher overall as compared to a home equity loan. This is because reverse mortgage loans often involve higher closing costs and fees.
  2. Tax benefits. The interest you pay on any home equity loan up to $100,000 is usually tax deductible. Reverse mortgages offer no comparable tax advantages.
  3. Maintaining equity. A reverse mortgage decreases the amount of equity in your home in proportion to the amount of cash you receive. Home equity loans, however, allow you to maintain the equity in your home as long as you make regular payments on the balance owed.

Reverse mortgage options

Backed by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), HECM reverse mortgage loans allow homeowners to access a portion of their equity based on the borrower's age as well as the value of their home.

While some reverse mortgages could be a great choice for you, the type Selleck is marketing may be different from the traditional government-backed one. Why? Annual volumes of the FHA's reverse mortgages have dwindled down to their lowest level in 13 years, and could be headed to even further levels of decline.

Due to continuing multi-billion dollar insurance fund losses, the FHA has been trying to rein in the reverse mortgage program by limiting the amounts seniors can borrow against their houses, raising insurance premiums and requiring applicants to demonstrate they are creditworthy.

Proprietary reverse mortgage

Fortunately, lenders are now offering alternatives to the traditional, federally-insured reverse mortgage program. A number of companies are now offering non-government reverse mortgage programs, also known as proprietary reverse mortgages.

These new proprietary reverse mortgage loans are especially popular among senior homeowners with high-valued properties hoping to access a greater amount of their equity than the current federally-set limit.

Originally, the HECM product was actually designed for low and medium value properties. In fact, the maximum loan amount on a traditional HECM reverse mortgage was as low as $200,000.

As of January 1, 2019 the loan limit increased to $726,525. Still, the HECM product could not offer higher loan amounts because they were legislated with loan limits.

Fortunately for homeowners in today's market, homes valued up to $6 million may be eligible to access their home equity with loan proceeds topping out near $3 million through a jumbo reverse mortgage.

Proprietary, or jumbo reverse mortgages, allow for significantly larger loan amounts than FHA. Additionally, they have no mortgage insurance premiums, and may even permit loans to condo owners who have struggled to get FHA financing approval.

What is a jumbo reverse mortgage?

A jumbo reverse mortgage is a more straightforward name for a proprietary reverse mortgage that is backed by a private company. The principal difference with the standard HECM and a proprietary, or jumbo, reverse mortgage program is simply to make it possible to get more money out of a high value home.

While proprietary reverse mortgage loans are a great alternative to your standard HECM (Home Equity Conversion Mortgage), they have their downsides as well.

Generally, proprietary reverse mortgage loans aren't aimed at the lower-to-moderate-cost housing market as FHA targets. The result being potentially large numbers of owners are screened out from coverage. They may limit the total amount of equity you can access more strictly than FHA and require better credit histories.

As compared to HECMs, proprietary reverse mortgages typically come with higher interest rates. An obvious downside to a larger loan: as with any jumbo loan, you are simply borrowing more money. Borrowing more money means accruing more interest.

Is a proprietary reverse mortgage right for you?

The economics of a HECM versus a privately sponsored reverse mortgage depends on the homeowner's age and how long they anticipate living in, or owning their home.

Whether it's a standard HECM or a proprietary reverse mortgage, these products can be effective ways for seniors to extract equity from their home.

Like all mortgage options, HECMs and proprietary alternatives should only be considered after doing your due diligence. Before you look to tap your equity, you should learn more about reverse mortgages and HECMs and research reverse mortgage rates and terms carefully to be certain you're getting the best deal for you and your situation.

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