Reverse Mortgage Mini-Series: Part III
As a refresher, a reverse mortgage allows a homeowner to convert some of the equity in his or her home into cash or a line of credit available for spending (or to be used to eliminate a small primary mortgage and increase cash flow that way). As opposed to traditional mortgages, reverse mortgages do not require the borrower to make a monthly payment. Instead, payments/funds are made available to the borrower (the amount withdrawn becomes the loan balance), interest accrues on the loan total, and the loan does not have to be repaid until the last borrower leaves the home permanently.
Reverse mortgages can be used to provide a safety net for aging and care expenses in the future for those who want to stay in their homes and may not have sufficient cash flow, insurance, or assets to fund those expenses, or simply to supplement retirement spending needs/wants via significant home equity that is otherwise inaccessible without selling the home.
It’s important to know the basics of reverse mortgages and think about the implications before acquiring one. For example, it likely doesn’t make sense to put a reverse mortgage in place if you have strong desires to leave your physical home (versus the net equity value of it) to your heirs (because they’d have to come up with a way to pay off the loan at your passing without selling the home). To learn more about the basics of reverse mortgages, check out the Reverse Mortgage Mini-Series: Part I and Reverse Mortgage Mini-Series: Part II.
In more recent years, a new type of reverse mortgage product has been created – the jumbo reverse mortgage.
Unlike the traditional reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and regulated by the Department of Housing and Urban Development (HUD) program rules, the Jumbo loans are proprietary products of the individual reverse mortgage lending firms. These jumbo loans provide access to higher lending limits than the FHA-insured and regulated loans; the 2022 lending limit for HECMs is $970,800 and for jumbo reverse mortgages it is up to $4,000,000. They are also potentially available at younger ages: the youngest borrower must be at least 62 with a HECM; with a jumbo product, the borrower can be as young as 60.
With housing prices continuing to rise and the high cost of living in many areas where our clients live (Northern California, Northern Virginia, Washington, D.C., New York, Colorado, and many more), these jumbo loans are appealing in that they can provide homeowners access to much larger loan balances or help pay off larger primary mortgage balances.
Other considerations: interest rates applied to the loan, due to the size and proprietary nature of the products, are often higher than HECMs, so the loan balance will accrue more interest over time (which will come into play if the borrower decides to move out or when he/she passes away – both cause the loan to become due).
And, these products aren’t regulated in the same way so caution must be used when acquiring one – there could be nefarious players out there trying to prey on seniors, so be sure to work with a trusted advisor if you or a loved one is considering a jumbo reverse mortgage.
In summary, reverse mortgages continue to be a potentially appealing strategy to consider in the right situation (which depends deeply on you, your financial situation, your long-term desires for your home, and more). If you’re curious to learn more or want some guidance for you or a loved one, we’d love to chat. We’re great people to think with®!