More Costly Private Loans
Reverse mortgages that are backed and owned by the private companies that develop them are known as "proprietary" reverse mortgages. These companies have proprietary or ownership rights to these loans, and they decide which lenders may offer them. By contrast, federally-insured Home Equity Conversion Mortgage (HECM) loans are backed by the federal government and may be offered by any lender approved by the Federal Housing Administration.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are generally the most expensive type of reverse mortgage. But if your home is worth more than HUD's 203-b limit for your county, one of these loans might give you larger cash advances than a HECM. It may also cost less than a HECM in the earlier years of the loan.
These mortgages can be used for any purpose, and are open to homeowners aged 62 and over. There are no income limits. Only one program is now available throughout the United States. Another is currently being offered in about 40 states. Several new programs are likely to become available during 2007.
If you live in a higher-valued home, you might be able to get more cash from a proprietary plan than from a HECM. But it pays to be very careful when comparing the costs and benefits of these loans to those of a HECM.
For example, the most widely available proprietary plan offers a creditline that does not grow larger over time. So what seems to be a smaller HECM creditline — which grows larger over time — can provide more total cash than an initially larger creditline from this proprietary plan. The Reverse Mortgage Calculators estimate how much cash would remain in a growing HECM creditline versus the non-growing creditline provided by this proprietary plan.
The most complete way to compare a proprietary loan to a HECM is to obtain a side-by-side comparison produced by software that meets AARP's model specifications for analyzing and comparing reverse mortgages. To learn how to get these comparisons, read the articles on "Choosing a Counselor" and "Selecting a Lender" in the Key Decisions section of this site.
Since the comparisons give you a lot of helpful details, AARP advises that you study them carefully before making any decisions. Ask your counselor to help you with any of the details you don't understand.
"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 offered these loans are either no longer in business or no longer offer these loans.
An Uninsured Exception
In some parts of Arizona and Massachusetts, you can still get an "uninsured" reverse mortgage. These loans typically provide monthly advances only, and they must be repaid in full on a specific date.
These are the only reverse mortgages that do not permit you to remain in your home for as long as you choose. But there is no mortgage insurance premium charged on these loans. So if you definitely plan to sell and move before they become due, these less costly private loans may make sense for you. If these loans are available in your area, HECM counselors generally can help you find them.
AARP does not endorse any reverse mortgage lender or product.
