Proprietary Reverse Mortgage: What To Know
Lauren Nowacki6-minute read
August 27, 2021
Whether it’s longer life expectancies, rising costs of living or the desire to do more in retirement, many of today’s seniors are finding that their retirement savings and Social Security aren’t enough for everything they want or need in their later years.
To help supplement their retirement income, some older Americans are turning to reverse mortgages. These types of loans allow homeowners to borrow money against the equity in their home and are only available to seniors who are 62 and older. It’s important to note that Rocket Mortgage® does not offer reverse mortgages.
There are three types of reverse mortgages: a home equity conversion mortgage (HECM), a proprietary reverse mortgage and a single-use reverse mortgage. This article will cover the proprietary reverse mortgage – what it is, how it works and who should consider one.
What Is A Proprietary Reverse Mortgage?
A proprietary reverse mortgage is a private loan that allows you to convert a portion of your home’s equity into cash.
As private loans, proprietary reverse mortgages are offered and insured by private lenders and are not backed by the government. That means they are not federally insured, nor are they bound by certain limits set by the Federal Housing Administration (FHA). With the ability to loan more than the federal limit, these loans are also known as jumbo reverse mortgages.
Proprietary Reverse Mortgages VS. HECMs
Unlike the proprietary reverse mortgage, the HECM is a government-insured reverse mortgage. Just like the proprietary reverse mortgage, the HECM allows you to borrow against the equity in your home. What makes the HECM different is that it’s insured by the Federal Housing Finance Agency (FHFA), which means it has loan limits and some additional guidelines put in place to protect borrowers.
The HECM loan limit, or maximum claim amount, for 2021 is $822,375. That means the highest home value that can be used to calculate your reverse mortgage proceeds is $822,375. If your home value is $1,000,000, the amount of money you’ll receive from a HECM will be determined using a value of $822,375 – limiting the amount of proceeds you could actually get. With a proprietary reverse mortgage, the full $1,000,000 value of the home would be used, providing access to more equity. Keep in mind that home value is just one factor in determining how much you can borrow. With a proprietary reverse mortgage, the other factors will depend on your lender.
The HECM also requires borrowers to go through reverse mortgage counseling and a financial assessment. While the counseling session ensures the borrower understands the financial obligations of the loan and any alternative options they may have, the financial assessment ensures the borrower is able to uphold those loan obligations, such as continuing to pay their property taxes and homeowners insurance.
For some borrowers, the loan limits and additional guidelines can be a good thing. For others, they can be limiting.
Of course, since both are reverse mortgages, both the HECM and proprietary reverse mortgage have similarities, too. For example, the proceeds from both loans can be used for anything. They are also more expensive than traditional home loans.
Reverse mortgages, no matter the type, can be helpful financial tools in retirement, but they’re not for everyone, If you’re unsure which reverse mortgage, if any, is right for you and your situation, we recommend speaking to a financial advisor. There are also a few ways to determine whether this type of loan, specifically a proprietary reverse mortgage, is right for you.
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Who Needs A Proprietary Reverse Mortgage?
To qualify for this type of loan, you must be 62 or older, have enough equity in the home and use the home as a primary residence. You can own your home free and clear or have an existing mortgage.
A proprietary reverse mortgage may be a better fit for some borrowers than others. Those types of borrowers may be homeowners with a primary residence valued over $822,375, who want to get the most proceeds possible or just want to avoid paying FHA insurance and counseling fees.
If you match this type of borrower, you should still research all of your options, including other reverse mortgages and alternative loan options, and shop around for the best loan terms.
How Do Proprietary Reverse Mortgages Work?
With a proprietary reverse mortgage, your proceeds come from your home’s equity. The loan first pays off your current mortgage, then any remaining proceeds are provided in a lump sum that you can use for anything and are nontaxable. You must continue to pay your property taxes and homeowners insurance and maintain your home and your name stays on the title of the home.
Because they’re not federally-insured, most proprietary reverse mortgages don’t require upfront mortgage insurance or monthly mortgage insurance premiums. However, they often come with higher interest rates.
The Pros And Cons Of Proprietary Reverse Mortgages
A proprietary reverse mortgage can be riskier than a HECM or a traditional home loan, so it’s important to consider the pros and cons of this type of loan.
The Pros Of Proprietary Reverse Mortgages
- Larger loan amounts: Because the loan doesn’t have to conform to loan limits set by the FHFA, you can receive larger loan amounts with proprietary reverse mortgages than other types of reverse mortgages.
- Unlimited uses for funds: The proceeds from a proprietary reverse mortgage can be used for anything. That includes paying for home renovations, living expenses, travel and more. The only type of reverse mortgage that limits how you can use your funds is the single-purpose reverse mortgage.
- No upfront mortgage insurance: Since these loans aren’t federally insured, you won’t pay upfront mortgage insurance fees. The upfront mortgage insurance fee for a HECM is typically about 2% of your home’s value. Not having to pay that fee on a $500,000 home could save you $10,000.
- No monthly mortgage payments: This type of loan pays off your existing mortgage and you’re not required to make payments on the reverse mortgage until the loan comes due. However, you must still pay your property taxes and homeowners insurance.
The Cons Of Proprietary Reverse Mortgages
- May not offer disbursement options: Most lenders only offer the proceeds in a lump sum payment. With a HECM, you can receive funds in a lump sum payment, monthly distributions, a line of credit or any combination of the three.
- High interest rates: Because proprietary loans can be riskier for the lender, interest rates for these loans can go as high as 6%. Currently, interest rates for the HECM are up to about 4%.
- Fewer protections: The government put certain guidelines in place for the HECM in order to ensure borrowers were aware of their options, understood their responsibilities and were in a good financial position to be successful with their loans. Without these features, it’s up to the borrower to make an educated decision based on their financial situation and all of the options available to them.
Should I Apply For A Proprietary Reverse Mortgage?
If you’re thinking of applying for a proprietary reverse mortgage, keep in mind the general qualification requirements. You must be at least 62 years old and have enough equity in your home. The home must be your primary residence. You’ll want to make sure, too, that you’re able to continue paying your property taxes and homeowners insurance and maintain your home. Speaking to a financial advisor about your options may be helpful, too.
If you’re considering a proprietary reverse mortgage, it’s a good idea to shop around to find the lender with the best interest rates and lowest fees. Since these are private loans, the lender has more say in qualification requirements, loan terms and how much it’s able to lend.
When reviewing your financial options, you should also see if a home equity line of credit or a home equity loan makes more sense for your finances and your goals. Rocket Mortgage does not offer home equity loans or HELOCs.
The Bottom Line
A proprietary reverse mortgage is one of three types of reverse mortgage loans. It allows you to access the equity in your home and use the money for anything you like. Because it’s not government insured, you may be able to get more proceeds than other reverse mortgages may provide and you don’t have to pay an upfront mortgage fee. However, interest rates may be higher and more risk may be involved. It is important to educate yourself on this type of loan and weigh its benefits and drawbacks.
If you’re looking for ways to supplement your retirement income or fund a home project, consider other refinancing options through Rocket Mortgage.
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