Proprietary Reverse Mortgage: What You Need To Know

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’re not federally insured, nor are they bound by certain limits set by the Federal Housing Administration (FHA). These loans are also known as jumbo reverse mortgages, since lenders can lend amounts larger than the federal limit.

Proprietary Reverse Mortgages Vs. HECMs

Unlike the proprietary reverse mortgage, the HECM is a government-insured reverse mortgage. 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 FHA, which means it has loan limits and some additional guidelines in place to protect borrowers.

The HECM loan limit, or maximum claim amount, for 2022 is $970,800. That means the highest home value that can be used to calculate your reverse mortgage proceeds is $970,800. 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 $970,800 – limiting the amount you could actually get. With a proprietary reverse mortgage, the full $1,000,000 value of the home could be used, providing access to more equity. Keep in mind that home value is just one factor in determining how much you can borrow. The other factors will depend on your lender.

The HECM also requires borrowers to go through reverse mortgage counseling and a financial assessment. 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.

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. And, 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 we recommend speaking to a financial advisor.

Who Can Benefit From 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. These could be homeowners with a primary residence valued over $970,800, who want to get the most proceeds possible or those who just want to avoid paying FHA insurance and counseling fees.

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.