“Proprietary” reverse mortgages can provide larger loan amounts than the HECM program, but they are generally the most expensive type of reverse mortgage. Private companies develop and back these loans, and decide which lenders may offer them. By contrast, HECMs are backed by the U. S. Government and may be offered by any lender approved by the Federal Housing Administration.
A new type of proprietary reverse mortgage now being developed by some credit unions, however, may provide a clearly lower-cost alternative to HECMs. These plans would provide smaller loan amounts than a HECM, but would charge much smaller fees.
The best way to compare a proprietary plan with a HECM is to use a side-by-side comparison produced by software that meets AARP’s model specifications for analyzing reverse mortgages. Information on obtaining these revealing comparisons is presented in the article on Choosing a Counselor.
"Shared" Equity and Appreciation
The most costly proprietary reverse mortgages have charged "contingent interest" in the form of a "shared equity" or "shared appreciation" fee. With a "shared equity" loan, the borrower owes a percent of a home's value when a loan is repaid. With a "shared appreciation" loan, the borrower owes a percent of any increase in the home's value since the loan was closed.
The earliest of these loans had the largest fees, up to 80% of a home's value or 100% of its appreciation. But all of the companies that initially offered these loans are either no longer in business or no longer offer these loans. Within the past year, however, new versions of “shared appreciation” plans have begun to appear. Although these plans may not be in the form of loans, their costs can be extremely high when home values grow substantially.