Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages are two distinct financial products designed to help older homeowners tap into their home equity without having to sell their property. While both serve the same basic purpose, they differ significantly in terms of their availability, terms, and regulations.
HECMs (Home Equity Conversion Mortgages):
HECMs are the most common type of reverse mortgage and are insured by the Federal Housing Administration (FHA). These loans are tightly regulated and have specific eligibility criteria, making them widely available to most senior homeowners.
Government-Backed: HECMs are backed by the FHA, providing additional security to both lenders and borrowers. This government insurance ensures that the homeowner will never owe more than the home is worth at the time of repayment.
Eligibility: To qualify for a HECM, homeowners must be at least 62 years old and live in the home as their primary residence. Credit and income requirements are minimal, and there is a mandatory counseling session to ensure borrowers fully understand the terms and implications.
Loan Limits: HECMs have maximum loan limits set by the FHA. These limits vary by location but typically fall within a certain range. Borrowers with higher-valued homes may find these limits restricting.
Repayment: HECMs only require repayment when the homeowner permanently moves out of the home, sells it, or passes away. Repayment is typically made by selling the home, and the proceeds go towards paying off the loan.
Interest Rates: HECMs offer both fixed and variable interest rates. The interest on the loan accrues over time and is added to the balance, impacting the final repayment amount.
Proprietary Reverse Mortgages:
Proprietary reverse mortgages, often referred to as jumbo or private reverse mortgages, are private loans offered by financial institutions. They are not government-insured and are typically designed for homeowners with high-value properties.
Non-Governmental: Unlike HECMs, proprietary reverse mortgages are not insured by the government. Therefore, they carry more risk for both lenders and borrowers.
Eligibility: These loans are often available to homeowners as young as 60 or 65, but eligibility criteria may vary between lenders. Credit and income requirements can be more stringent.
Loan Limits: Since proprietary reverse mortgages are not bound by FHA loan limits, they are better suited for homeowners with high-value properties who need to access a significant amount of equity.
Repayment: Repayment terms may vary between lenders, but generally, they are due when the homeowner moves out, sells the property, or passes away. Some proprietary reverse mortgages allow for interest-only payments during the life of the loan.
Interest Rates: Proprietary reverse mortgages often offer more diverse interest rate options, including fixed and variable rates. However, they may come with higher interest rates compared to HECMs.
In summary, the main differences between HECMs and proprietary reverse mortgages are their government backing, eligibility criteria, loan limits, repayment terms, and interest rates. HECMs are a widely accessible and government-insured option for older homeowners, while proprietary reverse mortgages are more suitable for those with high-value homes who may require larger loan amounts. It's crucial for homeowners considering a reverse mortgage to carefully assess their financial needs, consult with a financial advisor, and thoroughly compare the options available to determine which one best fits their unique circumstances.
