What is a jumbo reverse mortgage?
For high-value home (worth at least a million dollars), a traditional mortgage might not give you the most value. Limits for Government HECM is at $726,525 in 2019. If your property is over $1MM, you may need to look into a jumbo reverse mortgage. Reverse mortgages guaranteed by the FHA are called Home Equity Conversion Mortgages (HECM).
Jumbo reverse mortgages allow borrowers to access equity on homes valued up to $6 million. Since jumbo reverse mortgage lenders aren’t FHA guaranteed, lenders don’t have to follow FHA guidelines about loan size.
Aside from issuing larger loans, most jumbo reverse mortgage lenders follow other FHA guidelines. Importantly, most lenders offer robust borrower protections that mimic FHA protections. Most companies that offer proprietary reverse mortgages follow the same consumer protections that are found on FHA guaranteed reverse mortgages.
For example, most jumbo reverse mortgages are “non-recourse” loans. If your loan balance ends up being more than the value of your home, you do not have to pay the difference. The lender has to absorb the loss on their own. On top of that, co-borrowers or eligible non-borrowing spouses (who must be married at the time of the loan origination, and be listed on the loan documents) can stay in the house as long as they are physically able. As long as you continue to pay taxes, insurance or maintenance costs, you should be able to stay in your home
What makes jumbo reverse mortgages different
Larger funding limit: While traditional reverse mortgages limit borrowers to loans up to $726,525, jumbo reverse mortgages allow borrowers to borrow up to $6 million. The exact amount you can borrow depends on the value of your house, your age, and how much you currently owe on the home.
Interest rates: Interest rates on jumbo reverse mortgages tend to be higher than rates on FHA guaranteed reverse mortgages. Unless your house is worth a million dollars or more, it tends to make more sense to go with FHA, because the proceeds are similar and the interest rates are lower.
Fee structures: Reverse mortgages guaranteed by the FHA carry. The biggest charge is an upfront mortgage insurance premium (MIP) of 2% of the loan value. Borrowers also have to pay an annual MIP charge of 0.5% of the mortgage balance. Jumbo reverse mortgages don’t carry these insurance charges.
Protections not FHA guaranteed: Jumbo reverse mortgage lenders extend borrowers the same protections as the FHA offers. For example, most jumbo reverse mortgages do not require you to pay the difference if the loan exceeds the house’s value. Additionally, most jumbo reverse mortgages allow co-borrowers and eligible non-borrowing spouses to live in the house indefinitely as long as taxes, insurance and maintenance remain paid. However, these protections are not federally mandated. Borrowers must ask lenders specifically about the consumer protections that the lender offers.
Jumbo reverse mortgage advantages
Access more value from home: Jumbo reverse mortgages allow borrowers to access up to $6 million of their home’s value; by contrast, FHA guaranteed reverse mortgages only offer loan balances up to $726,525. Jumbo reverse mortgages really start to make sense once you have a home with an appraised value of at least a million dollars. With smaller home value, you’ll probably find the FHA guaranteed product is a better deal.
Allow borrower to eliminate payments on a larger mortgage balance: Jumbo reverse mortgages can be used to eliminate monthly mortgage payments while allowing retirees to stay in a high cost of living area. An FHA guaranteed reverse mortgage allows borrowers to refinance small mortgage balances, but jumbo reverse mortgage allows borrowers to refinance mortgage balances of several hundred thousand dollars or more. This can be a great benefit as cash flow is dramatically improved.
No mortgage insurance premiums: Since jumbo reverse mortgage payments aren’t FHA-guaranteed products, borrowers don’t have to pay upfront or ongoing mortgage insurance premiums.
Generally non-recourse loan: Most jumbo reverse mortgage lenders offer borrowers consumer protections that mimic the protections offered by the FHA. For example, most reverse mortgages are non-recourse loans— this means that neither you or your heirs will have to pay the difference if the loan value exceeds the home’s value.
However, this protection isn’t guaranteed. Do not assume that a jumbo reverse mortgage is a non-recourse loan. Ask your lender if the jumbo reverse mortgage is a non-recourse loan, and have them show you the part of the contract that explains that protection.
Fixed rate loans: Borrowers taking out jumbo reverse mortgages don’t need to worry about interest rate hikes. Right now, jumbo reverse mortgages are fixed rate loans. This means that your loan size will increase at a predictable rate.
Jumbo reverse mortgage risks
Must ask about consumer protections: While most lenders offer robust borrower protections, it is important to verify what protections are afforded particularly in regards to spouse and the non-recourse feature.
Must pay taxes, insurance and maintenance: A jumbo reverse mortgage eliminates your monthly mortgage obligation, but, just like with the regular Reverse, you must continue to pay taxes, insurance and maintenance costs on your home. If you fail to make these payments, you could be forced out of your home.
Must take loan proceeds right away: FHA guaranteed reverse mortgages offer borrowers a monthly payment or a line of credit borrowing option. With jumbo reverse mortgages, the options are more limited. Ask for specifics.
Higher interest rates: Interest rates on jumbo reverse mortgages are currently almost 1-2% higher than loans on FHA guaranteed mortgages. The higher interest rates mean that your home equity may diminish faster.
Does a jumbo reverse mortgage make sense for you?
If your house is worth $1,000,000 or more, and you want to access your home’s equity, a jumbo reverse mortgage could make sense for you. It’s an excellent way to use your home’s value to fund part of your retirement.
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