What Is a Jumbo Reverse Mortgage?

Definition and Examples of a Jumbo Reverse Mortgage

A jumbo reverse mortgage is a type of reverse mortgage available to homeowners over the age of 62. What sets it apart from other reverse mortgages is that jumbo reverse mortgage borrowers can tap into higher amounts than are allowed by the Federal Housing Administration’s (FHA) version of reverse mortgages, known as HECMs. Non-HECM loans are not federally insured, but they may appeal to owners of high-value homes.

Like all reverse mortgages, the purpose of a jumbo reverse mortgage is to borrow from your home equity and gain access to cash when you’re older. You’ll still be responsible for paying property taxes and home insurance premiums, but instead of having a monthly mortgage payment, you’ll receive payments from the lender.

• Alternate definition: A jumbo reverse mortgage is a private reverse mortgage that does not have a cap or loan limit.
• Alternate names: Non-HECM reverse mortgage; proprietary reverse mortgage

Here’s an example of a jumbo reverse mortgage in action. Say a 65-year-old owner of a house valued at $1.5 million wants to take advantage of their home equity. They might want to supplement a fixed income that leaves them with little cash at the end of the month to cover bills, or perhaps they need a lump sum to cover a medical bill.

Once their jumbo reverse mortgage is approved, the homeowner receives a lump-sum payment. They no longer have to make a monthly mortgage payment, but they do still have to pay property taxes, insurance premiums, and home maintenance costs.

How a Jumbo Reverse Mortgage Works

To qualify for a jumbo reverse mortgage, you’ll typically need to be at least 62 years old, live in the home as your primary residence, and have a specific amount of equity.

If you have an existing mortgage, funds from the reverse mortgage will first be used to pay it off, and the remaining loan proceeds will go to you. Some lenders will issue a lump-sum payment, while others may offer a line of credit or monthly payments. The amount of your jumbo reverse mortgage depends on your age, the interest rate, and the appraised value of your home. Once you receive the funds, there are no restrictions on how you spend them.

Over time, your loan amount increases and your equity decreases as monthly interest and fees add up—the opposite of what happens with a regular mortgage. For the duration of the jumbo reverse mortgage, you will not have to make payments. If you decide to sell or leave the home, or you pass away, the loan amount will come due. The good news is that because a jumbo reverse mortgage is a non-recourse loan, your heirs will not inherit that debt. However, it will be deducted from the amount they inherit when the home is sold.

Alternatives to a Jumbo Reverse Mortgage

A jumbo reverse mortgage isn’t necessarily the ideal move for all older homeowners, even if their home is appraised at a high enough value. If paying your regular mortgage has become too difficult or you need access to cash, it might make more sense to explore other options, including:

• HECM: If you can stay under the loan limits of an FHA-backed reverse mortgage program, it could be a safer move with lower interest rates than a proprietary loan. However, you will have to pay mortgage insurance premiums.
• Home equity line of credit (HELOC): Because you’ll only borrow what you need and pay interest on that amount, a HELOC is ideal if you’re looking for peace of mind rather than a large cash infusion.
• Refinance: If you’re looking to lower your monthly payments, you might be able to do so by refinancing your mortgage. And if you qualify for a cash-out refinance, you’ll also get a lump sum of money.
• Home equity loan: If you just need some cash to pay for a bill or home repair, this product could be worth considering. A home equity loan is essentially a second mortgage, however, so it’s not a good fit for someone who is already struggling to afford monthly bills.
• Sell your home: Although leaving your home behind may be an emotional decision, high-value homeowners in their older years could potentially downsize by moving to a smaller, less expensive home. The proceeds of their home sale can provide some financial security and potentially fund enjoyment, such as travel.

Pros and Cons of a Jumbo Reverse Mortgage

Pros Explained

• No mortgage insurance required: Since it’s not a federally backed loan, a jumbo reverse mortgage doesn’t require you to pay a mortgage insurance premium. With an HECM, you’ll pay both an upfront mortgage insurance premium based on your home’s value and an ongoing premium of 0.5% of your outstanding balance.
• Access to more funds: With no loan limits, a jumbo reverse mortgage can help high-value homeowners tap into up to $4 million in equity, depending on the state and lender.

Cons Explained

• Higher interest rate than other loan products: Because they are considered more risky due to their lack of federal backing, jumbo reverse mortgages typically come with higher interest rates.
• More onus on the borrower: Although private lenders are encouraged to require counseling and follow HECM best practices, they are not required to do so. Unfortunately, some lenders may try to take advantage of older borrowers who aren’t aware of all the details. When considering jumbo reverse mortgages, be on the lookout for potential predatory practices and deceptive advertising.
• Less to leave to your heirs: As long as you understand that your equity will decrease over time, this isn’t necessarily a “con.” After all, it’s enabling you to benefit from the home equity you’ve built while you’re around to enjoy it. But it’s important to be aware of this factor since a reverse mortgage will reduce the amount of inheritance you’ll leave behind.

Is a Jumbo Reverse Mortgage Worth It?

Under the right circumstances, a jumbo reverse mortgage can be a smart financial move. If you have a lot of equity in a high-value home, and you want to continue living in that home for a long time, a jumbo reverse mortgage allows you to tap into your equity to make your retirement years more enjoyable and less cash-strapped.

Of course, this kind of reverse mortgage can be especially favorable during periods of rising home values and lower interest rates. If you think a jumbo reverse mortgage is a good option for you, make sure you understand that your equity will decrease over time, and do your research to find a reputable lender.

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