Jumbo Reverse Mortgages, otherwise known as Proprietary Reverse Mortgages, are intended for borrowers who wish to engage in the benefits of a reverse mortgage, but may not fulfill the requirements for the popular FHA Home Equity Conversion Mortgage (HECM).
Some reasons people might get a jumbo reverse mortgage are if they need a loan above the county loan limits in California, if they don’t meet the age requirements for a HECM mortgage, or if their property doesn’t meet FHA underwriting guidelines (i.e. non-HUD approved condos).
The Stigma Surrounding Reverse Mortgages
The general public is hesitant about reverse mortgages because historically the product has been used by loan officers to take advantage of misinformed senior citizens. The shadow of predatory lending has hung over the mortgage industry for years, and it is only recently that borrowers are starting to regain the trust in the industry. This is in large part due to government regulations that keep lenders in check post 2008 mortgage meltdown.
However, while the forward mortgage industry has started to regain the confidence of the public, reverse mortgages continue to be seen as a risky option for borrowers. This is in part due to the way reverse mortgages are conveyed through the media and advertising. Many people see reverse mortgages as a scam to take away a senior borrower’s home after they pass, without consulting the children of the borrower. In this way, a general mistrust is formed between the heirs and reverse mortgage originators.
After 2008, the industry introduced heavy regulations leading to standardization of fees, counseling options, mortgage insurance, and overall higher client and heir protections. Although the HUD regulated HECM is the safest option for clients with mandatory counseling required for all transactions, many of these protections are in place at the jumbo level. However, since these are not strictly government regulated, there is still a higher possibility of scams within the jumbo reverse mortgage realm.
Reverse Mortgage – A Financial Planning Tool
Believe it or not, some financial advisors will tell you that opening a reverse mortgage is a good idea even if you don’t even use it. Although a reverse mortgage is a long-term investment tool with a larger amount of closing costs, opening a reverse mortgage that has no monthly payment requirement is a savvy means of establishing a backup financial plan in the event of emergencies.
By pulling funds from the line of credit in years where there is a dip in the market, retirees can avoid the sequence of returns risk that allow mistakes in the first years of retirement to compound and shorten the portfolio lifetime.
By taking out distributions on an as-needed basis, the overall loan balance remains small and the overall appreciation of the property will outpace the accumulation of the loan. This is a common occurrence where retirees can have added security against market downside and still enjoy the appreciation of their property by maintaining growth in equity.
Requirements for a Jumbo Reverse Mortgage
Jumbo products will have many of the same requirements as the HECM product, such as the main criteria listed below:
- You must occupy the home as a primary residence
- You must maintain your home and stay current on taxes and insurance
- You must have enough equity to cover the current loan balance
Reasons to Get a Jumbo Reverse Mortgage
- You want to remove your monthly payment obligation from your current jumbo loan – If you have enough equity in your home, you can use a jumbo reverse mortgage to pay off the current loan
- Extra cash for retirement – Additional liquidity from tapping into the equity in your home can help with long term financial planning and ease any future financial concerns
- Age in Place – Life expectancy is increasing and with limited income, it is becoming harder to age in place for long period of time with increasing costs of living. By supplementing income with a reverse mortgage, seniors can afford to age in place and avoid the cumbersome task of moving to a cheaper place to live
- Financial Independence – Many senior citizens rely on family members for financial support as retirement funds run low and medical expenses
- Improved Quality of Life – By adding additional discretionary spending money, reverse mortgage clients can enjoy their time rather than surviving with a limited budget
- Healthcare Costs – With a jumbo reverse mortgage, clients can afford at home healthcare and avoid transitioning to living in costly nursing homes
- Avoid Sequence of Returns Risk – retirees who tap into their savings during economic downturns can significantly reduce the longevity of their portfolio by selling their assets at a low. By pulling from the equity of your home to avoid selling stocks at a low point, a retirement plan is set to succeed regardless of uncontrollable economic factors
Pros and Cons of a Jumbo Reverse Mortgage
Pros of Jumbo Reverse Mortgages
- No mortgage insurance premiums (upfront or recurring)
- Lower minimum age
- Bigger lump sum payout without loan limits
Cons of Jumbo Reverse Mortgages
- Less buyer protections, such as mandatory counseling, and some non-recourse options which could mean heirs can be stuck with a bill greater than the value of the home
- Higher interest rate – with no monthly payment required this is only means the equity in your home will drop quicker than with a lower interest rate
Common Reverse Mortgage Myths
- Title of the property is turned over to the bank
- Loan proceeds are taxable
- Heirs will take on all the debt after passing away
- It is possible to outlive the loan and start making payments
- The bank will own the home when you are gone
When is a Reverse Mortgage Not a Good Idea?
Although jumbo reverse reverse mortgages can be a valuable resource to senior citizens looking for additional sources of income, there are situations where a reverse mortgage will not make sense for the borrower.
- The reverse mortgage does not meet the long term needs of the borrower – Reverse mortgages do not make sense for borrowers with a short timeline, looking for quick cash. The costs of a reverse mortgage are geared towards borrowers who want to draw large amounts of money from their home or are looking to gain long term security from the additional funds added to their budget
- The borrower wants to pass on a full inheritance – Many clients plan to leave their homes for their children to inherit to preserve a legacy. Since a reverse mortgage will take equity out of the property, it will limit the amount of inheritance left for heirs down the line
- No tangible net benefit to the borrower – clients should not be looking to get a reverse mortgage just for the sake of it. If the client has no tangible reason for taking the loan, they should not take on a product that may not be in their best interest
- The borrower does not understand the product – No one should make major financial decisions without knowing all the benefits and repercussions of their actions. A reverse mortgage is a complex loan product and these intricacies should be discussed with an expert and any involved family members to understand the risks and rewards.
Alternatives to Reverse Mortgages
Reverse mortgages are great for clients with a long-term outlook and financial plan for how they want to spend retirement. There are other options for borrowers looking to use their home to better their financial situation.
- HELOC: Borrowers looking to take equity out of their home, who can’t meet the FHA’s guidelines, such as borrowers under the age of 62, can look to get a HELOC for their current property. This option allows them to have the same benefits of safety net income and the ability to run up and pay down the credit line. However, HELOCs still have monthly payments and more stringent requirements for income and credit, which may not suit a senior citizen.
- Refinance: If the borrower can qualify for a refinance, they would be able to lower their monthly payments or take equity out of their home with a cash out refi. This will still result in the undesirable monthly payment compared to no payments for the reverse mortgage.
