Proprietary Mortgages vs. Home Equity Conversion Mortgages

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Proprietary Mortgages vs. Home Equity Conversion Mortgages

You may be familiar with reverse mortgages if you are 62 years of age or older and own a house. With the help of this financial instrument, you may convert the equity in your house into a flat amount, regular payments, or a line of credit. Reverse mortgages may provide financial breathing space to those who struggle on limited incomes while yet enabling you to remain in your cherished property.

Reverse mortgages have a straightforward premise, but there are three distinct sorts based on your income. We’ll go through the variations between a proprietary or jumbo reverse mortgage and a home equity conversion mortgage (HECM).

Key Takeaways

  • With fewer restrictions, proprietary reverse mortgages enable you to borrow larger sums of money.
  • HECMs, or home equity conversion mortgages, provide homeowners extra security.
  • A lender who has been approved by the Federal Housing Administration (FHA) must be used for a HECM.
  • Although a HECM has lower total expenses, a proprietary reverse mortgage offers lower upfront fees.

How a Reverse Mortgage Works

A reverse mortgage is a loan that uses a home’s equity as collateral. Only seniors over 62 with significant home equity are eligible for reverse mortgages. Following application, the borrower receives payment in the form of a lump amount, a monthly installment, or a line of credit.

The home’s owner must be able to pay all property taxes on time and maintain the home’s structural integrity. When a homeowner passes away, sells their home, or vacates their property for more than a year, the loan is due. The home is sold after they have left for one of these reasons, and the selling earnings are used to reimburse the lender for the amount lent plus interest and service costs.

How an HECM Works

Home equity conversion mortgages (HECMs), commonly referred to as reverse mortgages for seniors backed by the Federal Housing Administration (FHA), are reverse mortgages. The additional rules that come with that connection to the government also increase your level of safety.

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Since HECMs are FHA-insured, only lenders who have been authorized by the agency may offer them. Every borrower must also go to a mortgage counseling session hosted by the U.S. Department of Housing and Urban Development (HUD), where a counselor may explain how the HECM would affect the borrower’s financial situation. This lessens the prevalence of mortgage fraud, a significant issue.

The standards for an HECM are simple:

  • You must be age 62 or older.
  • The home, apartment, or other multifamily structure must be your principal residence.
  • You must have a sizeable equity stake, which is often understood to be 50% or more.
  • You must be able to keep the house upkeep, pay the homeowners insurance, and property taxes.
  • You can’t owe any federal debts, period.

The amount of your HECM loan depends on your equity, your age, the current interest rate, and either the assessed value or the $970,800 mortgage maximum, whichever is smaller. This prevents consumers from taking on excessive debt and getting into mortgage default.

An HECM has one negative in that there are extra costs. Since HECMs are nonrecourse loans, the lender cannot compel you to sell even if you borrow more money than your available equity. Each HECM is subject to upfront mortgage insurance fees of 2% of the total loan at closing, and during the life of the loan, you’ll need to pay an annual mortgage insurance payment of 0.5% of the outstanding mortgage amount. This is done to assist safeguard lenders.

HECMs also need origination costs for things like title fees and appraisals, which are required for any loan closing. The monthly maximum for any service costs is $35.

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How a Proprietary or Jumbo Reverse Mortgage Works

For homeowners with more expensive residences, a proprietary or jumbo reverse mortgage may be necessary. Those who own several homes may desire to borrow more than is permitted since the amount you may borrow from a HECM is capped. Although a customized reverse mortgage is seldom close to borrowing your whole equity value, it may surpass the FHA limit.

Since proprietary reverse mortgages aren’t insured by the FHA, they are exempt from FHA requirements including upfront and recurring mortgage insurance payments and the required counseling session. Even though it can seem to be a beneficial thing, seniors lose a layer of protection when this happens. Lenders may issue private reverse mortgages even if they don’t qualify for FHA backing.

Additionally, compared to HECMs, proprietary reverse mortgages sometimes offer lower upfront fees. A significant component of this is doing away with mortgage insurance. HECM interest rates, on the other hand, are often lower than those of proprietary reverse mortgages. To establish which is the most cost-effective choice for your particular circumstance, you’ll need to perform the arithmetic.

Important

The majority of exclusive reverse mortgages only provide payment in a lump amount at closing. An HECM is a preferable option if you wish to pay in installments every month.

Are proprietary reverse mortgages susceptible to scams?

Jumbo reverse mortgages are provided by a large number of reputable businesses. They are more vulnerable to frauds nonetheless since there is no need for mortgage counseling or Federal Housing Administration (FHA) support for the lender. There is greater motivation to entice seniors to think about proprietary reverse mortgages since more expensive properties are up for sale.

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Is there an age limit for proprietary reverse mortgages?

Yes. Similar to home equity conversion mortgages, the general requirement for proprietary reverse mortgages is age 62. (HECMs).However, some businesses start providing them at age 60. One business said it will start providing exclusive reverse mortgages to homeowners 55 and older, but only in a few areas. To learn what the maximum age is in your state, contact the mortgage lender.

Is there a limit on how I use my proprietary reverse mortgage funds?

No. You may pay off the existing mortgage, cover house repairs, consolidate debt, or even go on vacation with the money from your jumbo reverse mortgage. Remember that when you sell your property or die away, the loan will still need to be paid back, and your heirs will then have to sell the house or find another method to pay it off.

The Bottom Line

Both HECMs and proprietary reverse mortgages provide you the option to borrow money against your equity, but HECMs offer you additional safeguards. Finding the correct lender for a jumbo reverse mortgage may be more challenging due to the fact that HECMs are also considerably more prevalent than proprietary reverse mortgages. A jumbo reverse mortgage can be your only choice if you require a large sum of money and own a high-value house. Just keep in mind that you should still discuss the advantages and disadvantages of each sort of reverse mortgage with a reliable expert.

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