What Is a Proprietary Reverse Mortgage?

Do you need to access equity in your high-value home? If the house is your primary residence and you're over age 62, you're in luck. You could get a proprietary reverse mortgage and access equity from a private lender up to (potentially) higher limits. Read on to understand how these mortgages work, who can qualify, and what you need to consider before jumping on the reverse mortgage bandwagon  

What Is a Proprietary Reverse Mortgage?

If you own a home above the government limits, a proprietary reverse mortgage can be a solution to access equity. Sometimes called a jumbo reverse mortgage, this type of reverse mortgage is used by older people who want to access more money than a standard federally insured mortgage can offer. For 2024, the maximum reverse mortgage loan limit the FHA allows is $1,149,825.

A proprietary reverse mortgage works the same way most other reverse mortgages do. You can get a line of credit up to the assessed value of the home. You'll have the option to take this as a lump sum, set monthly annuities for life, or monthly payments for a number of years. It's the homeowner's choice. 

Also, like other reverse mortgages, the amount withdrawn only needs to be repaid when you, or your heirs, sell the home.

How Does a Proprietary Reverse Mortgage Work?

This type of reverse mortgage allows you to tap into a portion of your home’s equity. It is limited only by the amount the lender is willing to assume.

The loan amount is based on factors such as the home's appraised value, the equity you have in the house, and your age. 

A traditional reverse mortgage, called a Home Equity Conversion Mortgage (HECM) and proprietary reverse mortgages permit you to spend the funds however you wish. You could use the equity you take out to travel, cover home repairs or remodels, pay for long-term medical care, or for any other purpose. 

The only reason you'd be limited? If you choose to take out a single-purpose reverse mortgage, you are limited to paying for property taxes and necessary home repairs or other specific agreed-upon expenses. However, most lenders offer a proprietary reverse mortgage separate from a single-purpose reverse mortgage. 

Here's an example: Suppose your home's appraised value is $1.4 million, and you've built up $1.1 in equity. You could secure this type of reverse mortgage for some portion of that equity. For example, if you need $150,000 for a major renovation, you could take a lump-sum payment for those renovations. 

Proprietary Reverse Mortgage vs. Other Types of Reverse Mortgages

You can choose from various types of reverse mortgages based on your home's value and specific needs. Here is how different types of reverse mortgages work.  

Single-Purpose Reverse Mortgages

A single-purpose reverse mortgage is available to homeowners age 62 or older. If you meet this criterion, you can borrow against your home equity to fund a single lender-approved purpose. Most commonly, these purposes include paying property taxes, performing home maintenance, or major home repairs. 

Note to Patton: Link to https://www.benzinga.com/money/single-purpose-reverse-mortgage 

Home Equity Conversion Mortgages (HECMs)

A home equity conversion mortgage (HECM) is a type of Federal Housing Administration (FHA) insured reverse mortgage. HECMs make up the majority of reverse mortgages. With an

HECM, the maximum loan amount is limited. In addition, you'll need to pay for mortgage insurance premiums. However, you might get better terms than those of proprietary reverse mortgages.

Pros and Cons of Proprietary Reverse Mortgages

There are major pros and a few significant drawbacks to reverse mortgages. Here's what you need to consider specifically about these mortgage products:

Pros

Should you consider a proprietary reverse mortgage? Here are the pros:

• Larger loan amounts: If you need a reverse mortgage, the main reason to consider this type of mortgage would be if you need to access more of the equity in the home. 
• Use of funds: You can use these mortgages for anything you need, giving you greater flexibility.  
• No monthly payments: A proprietary reverse mortgage doesn't require you to make payments until you sell the home. You will still have to pay your property taxes and homeowners insurance.
• Savings on mortgage insurance: Since proprietary reverse mortgages aren't federally insured, you won’t have to pay upfront mortgage insurance fees. In contrast, an upfront mortgage insurance fee for a HECM is usually about 2% of your home’s value. 

Cons

Here are the disadvantages of a proprietary reverse mortgage:

• Reduced equity: The most obvious disadvantage of any reverse mortgage is that you'll reduce equity in the home. That will cut into future recovered value if you sell the home and reduce the equity you'll pass onto heirs. 
• Higher interest rates: Proprietary loans can be riskier for the lender, so you can expect higher interest rates than HECM.
• Fewer disbursement options: Some lenders only offer the proceeds in a lump-sum payment, compared to a HECM, where you typically have several distribution options. 
• Less protections: The government has put certain guidelines in place for the HECM to help borrowers make an informed financial decision. By taking out a larger loan, a proprietary reverse mortgage could put additional financial strain on your family. 

How Much Does a Proprietary Reverse Mortgage Cost?

A proprietary reverse mortgage gives you access to home equity, but it comes at a cost.

The lender typically charges interest, fees, and closing costs. Interest rates for proprietary reverse mortgages can be 6% or more. In contrast, interest rates for the HECM are around 4%. 

Closing costs could be up to $6,000 or more. Many lenders charge 2% of the loan's value in closing costs. You may also need to pay for an appraisal or other costs. Additionally, you must continue to pay homeowners' insurance and property taxes.

How to Qualify for a Proprietary Reverse Mortgage

To qualify for a proprietary reverse mortgage, you must be at least 62 years old and have equity built up in your property. If your property falls within the Federal Housing Administration's conforming loan limits, you could get a standard reverse mortgage. You could qualify for a proprietary reverse mortgage for properties outside the FHA limits. 

Here's a checklist:

1. The home must be your primary residence.
2. You must be at least 62 years old.
3. You must have enough equity in your home according to lender criteria.
4. You must continue paying property taxes and homeowners insurance.

When Do You Have to Pay a Proprietary Reverse Mortgage?

You must repay your proprietary reverse mortgage when you sell the home or when your heirs sell the house. For example, if you sell the house to move into a smaller property or an assisted living facility, this mortgage will be due. Likewise, if you pass away and your heirs decide to sell the home, the reverse mortgage will be due. 

If they choose to keep or live on the property, you must work out a repayment with the lender. With a standard reverse mortgage, heirs can inherit and live in a home but will be responsible for settling the debt. In the case of a proprietary reverse mortgage, heirs will typically need to agree on a new repayment plan or mortgage terms or pay off the reverse mortgage in full. 

Compare the Best Reverse Mortgage Lenders From Benzinga’s Top Loan Providers

You can find some of the best reverse mortgage lenders from Benzinga's partners here. Get access to the equity you need with these trusted offerings.

Final Tips on Proprietary Reverse Mortgages 

A proprietary reverse mortgage can give you access to equity in your high-value home. While you can get cash when needed, you'll still need to pay taxes and insurance and make necessary home repairs. In addition, overleveraging the home could jeopardize your financial future. 

It's a good idea to speak with a financial advisor and carefully consider other options before taking any reverse mortgage. You can also consider refinancing, check what happens to your reverse mortgage if you move to a nursing home, and understand why you might be disqualified from these loans. Or, check out the best reverse mortgage lenders here!

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