Understanding jumbo reverse mortgages
If you have a significant amount of equity in a high-value luxury home, and you want to generate a larger amount of cash than what’s available on a traditional reverse mortgage, you may consider a jumbo reverse mortgage.
Jumbo reverse mortgages, often called proprietary reverse mortgages, are available to homeowners who may want to borrow more than what is allowed by standard Home Equity Conversion Mortgages (HECMs). HECM loans are currently capped at $625,500.
Jumbo reverse mortgages are offered by private lenders. They all but disappeared from the marketplace following the 2008 housing crisis, but have slowly returned as home values have recovered. This type of loan is generally less restrictive than HECMs.
First, jumbo reverse mortgages do not have a cap. You can borrow as much as a lender will offer, even if the property has a value in the millions of dollars. These loans are typically used by homeowners with property values that exceed the HECM cap, allowing them to borrow more money.
In fact, some lenders advertise reverse mortgage loan amounts more than $2 million, and it’s possible to find reverse mortgage lenders willing provide funds on properties valued at $6 million. However, some jumbo reverse mortgage lenders will limit the loan amount to 25 percent of the home’s equity, which means the borrower would need equity of $2.5 million to receive a loan amount that exceeds the HECM cap.
Another advantage of a jumbo reverse mortgage is that it does not restrict the amount borrowers can receive in the first year of the mortgage term. Borrowers can usually obtain all the loan proceeds up front, whereas HECMs limit how much money a borrower can receive up front, called the “initial principal limit.” This limit will be based on age, the interest rate, the value of the home and the borrower’s financial assessment. Typically, an HECM will limit the upfront amount to 60 percent of the overall loan amount.
Jumbo reverse mortgages are not federally insured, which means there is no mortgage insurance premium added to the cost of the loan. HECMs, on the other hand, are federally insured and have an insurance premium cost tacked on.
Jumbo reverse mortgages are also available to homeowners with properties that do not qualify for an HECM, such as certain condominiums.
Another difference between this type of reverse mortgage and an HECM is jumbo loans do not require counseling before obtaining the loan.
Some jumbo reverse mortgages offer an equity sharing provision, which allows the borrower to pay part of the loan balance by passing along a portion of the increased value of the property. In return, the lender will charge an interest rate below the prevailing market rate.
There are no restrictions on how borrowers can use the proceeds. Common uses for jumbo reverse mortgage funds include:
Although they are less restrictive, jumbo reverse mortgages work in much the same way as standard reverse mortgages. You do not have to make monthly payments when you borrow against your home. Instead, the loan is repaid once you sell or move out of the property. You can still live in your home while taking out a jumbo reverse mortgage, but you must continue paying property taxes and insurance, and maintaining the property.
Funds from a reverse mortgage are typically non-taxable, and they do not impact a person’s Social Security or Medicare benefits.
For tax purposes, the interest that accrues on a reverse mortgage is not deductible until it is paid, which occurs when the full loan is repaid. The deduction you can take for interest paid on a reverse mortgage loan is also generally subject to the limit on home equity debt.