Homemade Money: A Consumer's Guide to Reverse Mortgages
Session 8 - Proprietary Reverse Mortgages
Course Section
More cash—with a cost
Is your home worth more than the average home value in your county? Is it worth a lot more? If so, you may be able to get more cash from a proprietary reverse mortgage than from an HECM. But proceed with caution: if you are not careful, you could end up being charged tens of thousands of dollars extra for nothing, or for a minimal increase in your cash benefits.
If your home's value substantially exceeds the HECM 203-b limit in your county, you may find a proprietary loan providing such greater cash benefits that you would be willing to pay its greater cost. Just make certain you clearly understand how much more expensive the proprietary reverse mortgage is likely to be.
These types of loans must be approached with great caution. In particular, do not apply unless the lender gives you comparisons with a similar HECM that meet AARP's model specifications for comparing reverse mortgages. Be sure you understand these comparisons in detail before applying.
A closer look–the case of the two widows
Just how much more expensive are proprietary reverse mortgages than HECMs? Take a look at the case of two 75-year-old widows in identical circumstances with identical needs. Each lives in a home worth $215,000 in a county where the HECM 203-b limit is $144,336. Each needs $79,500 to pay off an existing mortgage. Paying it off will enable each widow to remain in her home, reduce her expenses, and have more cash available each month.
In January 2002, each widow could get a creditline or lump sum of $79,921 from a proprietary Home Keeper MortgageSM backed by Fannie Mae. One widow selects HECM, the other selects Home Keeper. Each takes a $79,500 lump-sum advance at closing and uses it to pay off her existing, forward mortgage.
Payback time
Twelve years later (the approximate remaining life expectancy of a 75-year-old single female), the two widows, now 87, sell their homes. Each has gotten exactly the same cash benefit from her reverse mortgage: a $75,000 lump sum that has made it possible for her to remain in her home another dozen years. But because of Home Keeper's higher interest rate (on 1/2/01, the monthly adjustable rate on Home Keeper was 5.25 percent versus 3.78 percent for HECM), the widow who selected the Home Keeper will now owe about $15,000 more than the widow who selected HECM. Put another way, the widow who picked HECM will now have about $15,000 more equity remaining than the widow who selected Home Keeper.
Put still another way, the Home Keeper borrower will have paid $15,000 more than the HECM borrower—to get the same benefit. If these borrowers paid back their loans five years later, the cost difference would be about $38,000.
Another look
Now assume that these identical borrowers didn't have existing forward mortgages. Assume instead that each withdrew $560 per month from her creditline and is still going strong.
At age 87, the Home Keeper borrower will have completely used up all of her creditline. By contrast, the HECM borrower, having taken the same amount of cash from her creditline, will still have about $28,000 left available to her. In fact, due to her growing HECM creditline, she will be able to continue taking out $560 per month for another four and a half years. The bottom line: an initially smaller but growing HECM creditline can easily provide more total cash than an initially larger but non-growing Home Keeper creditline can.
Spare change
Let's look at two other widows, each in identical situations with identical needs. Each lives in a home worth $195,500 in county where the HECM 203-b limit is $157,415. Each is interested in a monthly loan advance only, and each wants to continue to receive the advance for as long as she lives in her home. In this case, Home Keeper provides $624.82 per month, compared to the $623.99 per month provided by HECM.
One widow selects HECM, the other selects Home Keeper. A dozen years later, the Home Keeper borrower has gotten 83 cents more per month for 12 years. But because Home Keeper's interest rate is greater than the comparable HECM rate (as noted above, on 1/2/01, the monthly adjustable rate on Home Keeper was 5.25 percent versus 3.78 percent for HECM), she now owes about $4,400 more than the HECM borrower owes. By forgoing the extra 83 cents a month, the HECM borrower retained $4,400 more equity than the Home Keeper borrower did.
The fine print
These comparisons demonstrate just how careful you must be when choosing a reverse mortgage. For people living in homes of high relative value, proprietary loans may look great on paper, offering larger lump sums and monthly advances than their HECM counterparts. But higher interest rates on the private loans can quickly eat up the difference, leaving the proprietary loan holder with less equity down the road.
Glossary
- Model specifications:
- A detailed set of rules for comparing reverse mortgages.
- Fannie Mae:
- "Fannie Mae" is the colloquial term for the Federal National Mortgage Association, an institution incorporated by Congress, which buys and sells conventional residential mortgages, as well as FHA-insured and VA-guaranteed mortgages.
- Home Keeper Mortgage SM:
- The reverse mortgage program developed and backed by Fannie Mae.
- Adjustable rate:
- An interest rate that changes, based on changes in a published market-rate index.
Can you tell the difference?
Now that you've learned about three different types of reverse mortgages, see if you can identify the main differences between them. This chart compares single-purpose, federally insured and proprietary reverse mortgages and can help you decide which is right for you.
