HECM vs. Proprietary Reverse Mortgage: A guide for Better choice

Retirement can bring a mix of excitement and uncertainty, especially when it comes to finances. If you’re looking to tap into your home’s equity for extra cash, you’ve probably come across reverse mortgages. 

But choosing the right one isn’t the most straightforward decision. Should you choose a HECM, the government-backed option, or a proprietary reverse mortgage made for high-value homes?

It’s easy to feel stuck and wonder if you’re making the right choice. Let’s break it down so you can make a confident, informed decision that works for you.

What is a HECM?

HECM (Home Equity Conversion Mortgage) is the most common type of reverse mortgage, backed by the Federal Housing Administration (FHA). It allows you to turn a portion of your home’s equity into cash while still owning your home.

Here’s what makes a HECM unique:

• Loan Limits: Since it’s federally regulated, there’s a cap on how much equity you can borrow.
• Built-In Safeguards: HECMs promise that you’ll never owe more than your home is worth when it’s sold.
• Eligibility Rules: You need to live in the home as your primary residence and stay on top of taxes and insurance.

What is a Proprietary Reverse Mortgage?

These are different because they’re offered by private lenders, not backed by the FHA. They’re a good option if your home is worth more than the borrowing limits set by HECMs.

Salient qualities include:

• Private Backing: Since these aren’t FHA loans, the lender sets the terms and features.
• Bigger Borrowing Potential: If you’ve got a high-value home, you can access more of your equity compared to a HECM.
• Custom Flexibility: While these loans can be more tailored to your needs, they don’t offer the same protections as an HECM.

Now, let’s dig deeper into how each type of reverse mortgage works and help you decide which one might be the best fit for you.

Benefits of HECM and Proprietary Reverse Mortgages

When it comes to reverse mortgages, each option has its perks. Let’s take a closer look at the specific benefits of each.

HECM Benefits

HECMs are a tried-and-true option if your home isn’t in the luxury market.

1. Government Backing and Consumer Protections
   One of the most significant advantages of a HECM is its connection to the Federal Housing Administration (FHA). This government backing means strict regulations are in place to protect you. From mandatory financial counseling to the promise that you’ll never owe more than your home’s value, HECMs are designed to keep you safe.
2. Availability for Modest-Value Homes
   HECMs are accessible to a wide range of homeowners, even if your property’s value isn’t sky-high. If you’re looking to tap into your equity without dealing with high upfront costs, a HECM could be the perfect fit.

Proprietary Reverse Mortgage Benefits

For homeowners with high-value properties, proprietary reverse mortgages offer some unique advantages that might be worth considering.

1. Higher Loan Limits for Luxury Properties
   Is your home worth more than the federal borrowing limit? A proprietary reverse mortgage can let you unlock a much larger portion of your equity. It’s an excellent option for those with luxury homes who want to access significant funds.
2. Greater Flexibility in Structuring Payouts
   Proprietary loans offer more customizable payout options. Whether you want a lump sum, monthly payments, or a combination of both, private lenders can provide flexibility that suits your financial goals.

Both HECMs and proprietary reverse mortgages offer valuable benefits. The key is to identify which option best suits your home’s value, financial needs, and personal preferences. 

Up next, you’ll see the potential drawbacks to watch out for so you have the complete picture before making a decision.

Eligibility Criteria

Choosing between a HECM or a proprietary reverse mortgage starts with knowing whether you qualify. Both options have specific eligibility requirements tailored to the type of borrower and property they’re designed to serve.

 Let’s dive into the details to help you determine where you stand.

HECM Eligibility Requirements

A HECM (Home Equity Conversion Mortgage) is the go-to reverse mortgage option for many homeowners, but it comes with some clear rules.

1. Age Requirement
   HECMs are exclusively for senior homeowners. You or your co-borrower must be at least 62 years old. This rule ensures the program is targeted at those nearing or in retirement.
2. Mandatory Counseling
   The FHA requires all HECM borrowers to attend a HUD-approved counseling session. This step protects you, helping you understand the loan’s terms, alternatives, and financial responsibilities.
3. Primary Residence and FHA-Approved Property
   • Primary Residence: Your home must be your main living space for the majority of the year. Vacation homes and investment properties don’t qualify.
   • FHA-Approved Property: Eligible properties include single-family homes, FHA-approved condominiums, or manufactured homes meeting HUD guidelines. Multi-unit properties (up to four units) are also eligible as long as you live in one of the units.
4. Financial Standing
   You must prove that you know how to stay current on property taxes, homeowners insurance, and any applicable HOA fees. If you can’t do that, some of your loan proceeds may be set aside to cover these costs.

Proprietary Reverse Mortgage Eligibility Requirements

Private lenders offer proprietary reverse mortgages. These mortgages have fewer restrictions and are tailored to a broader range of borrowers, especially those with high-value homes.

1. Age Flexibility
   Unlike HECMs, proprietary reverse mortgages don’t always require you to be 62 years old. Many lenders accept borrowers as young as 55, making this a good option for younger homeowners who still want to unlock home equity.
2. Higher-Value Homes Not Subject to FHA Caps
   Since FHA-imposed borrowing limits don’t bind these loans, you can access a larger portion of your home’s equity. This is particularly beneficial if your property value exceeds the federal cap of $1,089,300 (as of 2023).
3. Property Types
   Proprietary reverse mortgages typically accept a wider variety of homes than HECMs. This option might be the right fit if your property doesn’t meet FHA standards, such as certain luxury homes, large estates, or non-FHA-approved condos.
4. Credit and Income Requirements
   While proprietary reverse mortgages are more flexible, lenders may scrutinize your credit history and income to determine eligibility. This ensures you can meet ongoing financial obligations like taxes and insurance.

HECM vs. Proprietary Reverse Mortgage - Costs and Fees 

Understanding the costs associated with reverse mortgages is crucial to making an informed decision. While HECMs and proprietary reverse mortgages both provide a way to access your home equity, their fee structures and cost components differ significantly. Let’s break down the details to help you weigh your options.

HECM Costs

HECMs include several fees and costs designed to protect both borrowers and lenders. These are:

1. Mortgage Insurance Premiums (MIP)
   These premiums provide important borrower protections, such as ensuring that you will never owe more than the value of your home.
   • Upfront MIP: This is typically 2% of the appraised value of your home or the FHA lending limit (whichever is less). For example, the upfront MIP for a home valued at $300,000 would be $6,000.
   • Annual MIP: In addition to the upfront fee, you’ll pay an annual MIP of 0.5% of the outstanding loan balance. This fee is added to the loan balance over time so that you won’t pay it out of pocket.
2. Upfront Costs
   • Origination Fee: Lenders charge this fee to cover the processing of your loan. The amount is capped at $6,000 but varies based on your home’s value. For homes valued below $200,000, the fee is capped at 2% of the first $200,000 and 1% of the remaining balance.
   • Third-Party Fees: These include costs for appraisals, title insurance, credit checks, property inspections, and more. These fees can add up to several thousand dollars.
   • Closing Costs: Additional costs for loan documentation, recording fees, and escrow services may apply.
3. Ongoing Costs
   • Interest Rates: HECMs can have fixed or variable interest rates. Variable rates are tied to a financial index, which means they can fluctuate over time.
   • Service Fee: Your lender might charge a monthly servicing fee for maintaining your loan account, typically ranging from $25 to $35 per month.

Proprietary Reverse Mortgage Costs

Proprietary reverse mortgages are privately funded, so you don’t have to worry about being subjected to federal regulations. This gives lenders more flexibility in setting costs. Let’s learn more:

1. No Federal Insurance Costs
   Proprietary loans don’t require mortgage insurance premiums. However, the trade-off is that these loans lack the built-in protections provided by FHA insurance, such as the guarantee that you won’t owe more than your home’s value.
2. Interest Rates Vary by Lender
   • Proprietary reverse mortgages may offer fixed or variable interest rates, but the lender determines the rates rather than federal guidelines.
   • Depending on the lender and your financial profile, interest rates for proprietary loans could be higher or lower than those for HECMs. Borrowers with high-value homes or strong credit profiles may secure more favorable rates.
3. Customised Fees
   • Origination Fees: Private lenders set their origination fees, which can vary widely.
   • Third-Party Costs: Like HECMs, proprietary reverse mortgages include appraisal, title insurance, and closing fees. These costs depend on your lender and local market conditions.
4. Fewer Ongoing Costs
   • Without federal insurance requirements, proprietary reverse mortgages may have fewer recurring costs, such as servicing fees. However, it’s essential to review your lender’s terms carefully to understand the total cost over time.

Understanding the complete cost picture will help you make an informed choice. Up next, we’ll explore payout structures and how they differ between these two options, ensuring you pick the one that aligns with your financial goals. Stay tuned!

Choosing Between HECM and Proprietary Reverse Mortgages

Selecting the right reverse mortgage depends on your unique circumstances. Let's explore key factors to consider:

Property Value and Loan Amount Needs

• HECM (Home Equity Conversion Mortgage): Federally insured with borrowing limits set by the Federal Housing Administration (FHA). As of 2023, the maximum claim amount is $1,089,300. If your home's value exceeds this limit, an HECM may not allow you to access its full equity.
• Proprietary Reverse Mortgage: Private lenders offer these loans to high-value homes, often called jumbo reverse mortgages. They allow you to access a larger portion of your home's equity, making them suitable if your property value surpasses FHA limits.

Evaluate your home's value and the amount of equity you wish to access. A proprietary reverse mortgage might be more appropriate if your property is valued above FHA limits and you seek a substantial loan.

Age and Eligibility Differences

• HECM: Available to homeowners aged 62 or older. This strict age requirement aligns with the program's aim to assist seniors.
• Proprietary Reverse Mortgage: Some private lenders offer these loans to individuals as young as 55, though age requirements can vary by lender.

Your age plays a crucial role in determining eligibility. If you're under 62 and seeking a reverse mortgage, proprietary options may be your only choice.

Long-Term Financial Goals

• HECM: The upfront mortgage insurance premium (MIP) is typically 2% of the home's appraised value or the FHA lending limit, whichever is less. The ongoing costs include an annual MIP of 0.5% of the loan balance, interest charges, and potential servicing fees.
• Proprietary Reverse Mortgage: Generally, there are no mortgage insurance premiums, resulting in lower initial expenses. The lender determines Interest rates and fees, which can vary; some may be higher than HECM rates.

Assess both the immediate and long-term costs associated with each option. If minimizing upfront expenses is a priority and you have a high-value home, a proprietary reverse mortgage could be advantageous. 

However, if you value federal protections and are comfortable with the associated costs, a HECM might be preferable.

Your decision should align with your financial goals, property value, age, and comfort with associated costs and protections. Consulting with a financial advisor or reverse mortgage specialist can provide personalized insights tailored to your situation.

Frequently Asked Questions 

What is the difference between HECM and proprietary reverse mortgages?

HECMs are backed by the government. They offer borrowing limits and added protections, such as counseling and a non-recourse clause, to keep you safe. 

Proprietary reverse mortgages, on the other hand, are offered by private lenders. They let you borrow more—especially if you have a high-value home—but don’t have the same government safeguards.

Are proprietary reverse mortgages better for high-value properties?

If your home is worth a lot more than the FHA lending limit, a proprietary reverse mortgage might be a better fit. These loans let you access more of your home’s equity, making them ideal for luxury properties that exceed HECM limits.

What are the pros and cons of proprietary reverse mortgages?

Proprietary reverse mortgages are outstanding because they offer bigger payouts and more flexibility, especially for unique or high-value homes. However, they don’t include government protections like HECMs, and costs can vary depending on the lender.

How does the age requirement differ between HECM and proprietary reverse mortgages?

HECMs are only available if you’re 62 or older. Proprietary reverse mortgages are a bit more flexible, with some lenders accepting borrowers as young as 55. 

What’s the maximum loan amount for HECM vs. proprietary reverse mortgages?

For HECM, the maximum loan you can get is $1,089,300 (2023 FHA limit). Borrowing depends on home value, age, and interest rates. 

On the other hand, proprietary reverse mortgages are not capped. Loan amounts are based on property value, which is often much higher for luxury homes.

Can I switch from a proprietary reverse mortgage to a HECM?

Technically, you can switch, but it isn’t typical. You must refinance by paying off the proprietary loan and applying for a HECM, meeting all eligibility requirements.

What happens if I outlive my reverse mortgage terms?

You won’t outlive the loan as long as you meet its terms. For both HECMs and proprietary loans, repayment isn’t due until you move, sell, or pass away. Non-recourse protections ensure you won’t owe more than the home’s value.

Conclusion

When deciding between a HECM vs. proprietary reverse mortgage, it's important to consider factors like loan limits, protections, and property value.

Figuring out which one is right for you depends on your unique needs. HECMs offer government-backed protection and are ideal for modestly valued homes, while proprietary loans provide flexibility and larger payouts for high-value properties.

The right choice aligns with your financial goals and property value. 

Now is the right time to decide. Contact the experts at Truss Financial Group for tailored guidance and make the most of your home’s equity today!