Jumbo Reverse Mortgage, A Guide for High-Value Homeowners

Mortgagerateslocal.com – Are you looking for a way to access your home equity without having to sell your home or make monthly payments? Do you have a high-value home that exceeds the limit of a traditional reverse mortgage? If so, you may want to consider a jumbo reverse mortgage.

A jumbo reverse mortgage is a type of loan that lets you borrow more than the limit of a traditional reverse mortgage, which is backed by the Federal Housing Administration (FHA). A jumbo reverse mortgage can help you access a large amount of cash that you can use for any purpose, such as paying off debts, covering living expenses, improving your home, traveling, investing, or leaving a legacy for your heirs.

However, a jumbo reverse mortgage is not a simple or cheap option. It can be more expensive and complicated than a traditional reverse mortgage, and it can reduce your home equity and your net worth over time. Therefore, you should weigh the pros and cons of this option carefully, and compare it with other alternatives, before you apply.

In this article, we will explain what a jumbo reverse mortgage is, how it works, what are the alternatives, and what are the pros and cons of this option. We will also provide some tips on how to choose a reputable and reliable lender who can offer you the best deal for your situation. By the end of this article, you will have a better understanding of whether a jumbo reverse mortgage is right for you or not.

What Is a Jumbo Reverse Mortgage?

A jumbo reverse mortgage is a private loan that is not insured by the FHA or any other government agency. It is also known as a proprietary reverse mortgage or a non-HECM reverse mortgage. HECM stands for Home Equity Conversion Mortgage, which is the official name of the FHA-backed reverse mortgage program.

A jumbo reverse mortgage is designed for homeowners who have a high-value home and want to borrow more than the HECM limit, which is $970,800 in 2023. A jumbo reverse mortgage can let you borrow up to $4 million, depending on your home value, age, and interest rate.

Like a HECM, a jumbo reverse mortgage allows you to convert some of the equity in your home into cash. You can receive the money as a lump sum, a line of credit, or monthly payments. You don’t have to make any monthly payments to the lender, as long as you live in the home and keep up with the property taxes, insurance, and maintenance.

The loan becomes due when you move out, sell the home, or pass away. At that point, you or your heirs will have to repay the loan balance, plus interest and fees, or sell the home to pay off the loan. If the home is worth more than the loan balance, you or your heirs will keep the difference. If the home is worth less than the loan balance, you or your heirs will not owe anything more, as long as the loan is a non-recourse loan. A non-recourse loan means that the lender can only claim the home as collateral and cannot go after your other assets or income.

How Does a Jumbo Reverse Mortgage Work?

To qualify for a jumbo reverse mortgage, you must meet some eligibility requirements. These may vary by lender, but generally, you must:

• Be at least 62 years old (some lenders may have a lower age requirement, such as 55 or 60)
• Own your home outright or have a small mortgage balance that can be paid off with the loan proceeds
• Live in the home as your primary residence
• Have a home value that exceeds the HECM limit (some lenders may have a higher minimum value, such as $1 million or $1.5 million)
• Have at least 50% equity in your home (some lenders may require more, such as 60% or 70%)
• Pass a financial assessment to prove that you can afford the ongoing costs of homeownership
• Complete a counseling session with an independent, HUD-approved counselor to understand the risks and benefits of the loan

The amount that you can borrow with a jumbo reverse mortgage depends on several factors, such as:

• Your age: The older you are, the more you can borrow
• Your home value: The higher your home value, the more you can borrow
• Your interest rate: The lower your interest rate, the more you can borrow
• Your loan fees: The lower your loan fees, the more you can borrow

Each lender has its own formula to calculate the maximum loan amount, which is also known as the principal limit. You can use online calculators to get an estimate of how much you can borrow with a jumbo reverse mortgage, but you will need to contact a lender to get an exact quote.

The interest rate on a jumbo reverse mortgage can be either fixed or variable. A fixed rate means that the interest rate will stay the same for the life of the loan. A variable rate means that the interest rate will change periodically, based on a market index and a margin. A variable rate may offer more flexibility and lower initial costs, but it also carries more risk and uncertainty.

The loan fees on a jumbo reverse mortgage can include:

• An origination fee: This is a fee charged by the lender to cover the costs of processing and closing the loan. It is usually a percentage of the home value or the loan amount, whichever is lower. The origination fee may vary by lender, but it cannot exceed $6,000 for a HECM. For a jumbo reverse mortgage, there is no legal limit on the origination fee, so you should shop around and negotiate for the best deal.
• A mortgage insurance premium (MIP): This is a fee charged by the FHA to insure the HECM loan against the risk of loss. It consists of an upfront MIP, which is 2% of the home value or the HECM limit, whichever is lower, and an annual MIP, which is 0.5% of the loan balance. For a jumbo reverse mortgage, there is no MIP, since the loan is not insured by the FHA. However, some lenders may charge a similar fee, called a risk fee or a guarantee fee, to cover their own risk. This fee may vary by lender and by loan product, so you should compare different options and ask for a breakdown of the costs.
• A servicing fee: This is a fee charged by the lender or a third-party company to manage the loan account, such as sending statements, collecting payments, and disbursing funds. It is usually a flat monthly fee, which may range from $25 to $35 for a HECM. For a jumbo reverse mortgage, the servicing fee may vary by lender and by loan product, and it may be higher or lower than a HECM servicing fee. You should ask the lender about the servicing fee and how it may change over time.
• A counseling fee: This is a fee charged by the counselor who provides the mandatory counseling session before you apply for the loan. The counseling fee may vary by counselor and by location, but it cannot exceed $125 for a HECM. For a jumbo reverse mortgage, there is no legal limit on the counseling fee, so you should shop around and compare different counselors and their fees. Some counselors may offer the service for free or at a reduced rate, depending on your income and financial situation.

The loan fees on a jumbo reverse mortgage can be paid in different ways, such as:

• Deducting them from the loan proceeds: This means that you will receive less money upfront, but you will not have to pay anything out of pocket. However, this also means that you will pay interest on the fees for the life of the loan, which will increase the total cost of the loan.
• Paying them with your own funds: This means that you will pay the fees upfront, using your savings, income, or other sources of money. This will reduce the amount of interest that you will pay on the loan, but it will also reduce your available cash.
• Financing them into the loan balance: This means that you will add the fees to the loan balance, and pay them over time with interest. This will increase the amount of money that you can receive upfront, but it will also increase the total cost of the loan.

You should compare the different payment methods and choose the one that suits your needs and preferences. You should also ask the lender for a loan comparison and a total annual loan cost (TALC) disclosure, which will show you the estimated costs and payments of the loan over time.

Alternatives to a Jumbo Reverse Mortgage

A jumbo reverse mortgage is not the only option for high-value homeowners who want to access their home equity. There are some alternatives that you may want to consider, such as:

A home equity loan

This is a type of loan that lets you borrow a lump sum of money, using your home as collateral. You will have to make monthly payments to the lender, consisting of principal and interest. The interest rate on a home equity loan is usually fixed, and the loan term is usually 10 to 15 years.

A home equity loan may offer a lower interest rate and a higher loan amount than a jumbo reverse mortgage, but it also requires you to have a good credit score and a sufficient income to qualify and repay the loan. Additionally, you will have to pay closing costs and fees, which may be similar to or higher than a jumbo reverse mortgage.

A home equity line of credit (HELOC)

This is a type of loan that lets you borrow money as you need it, up to a certain limit, using your home as collateral. You will only pay interest on the amount that you use, and you can repay and reuse the money as you wish. The interest rate on a HELOC is usually variable, and the loan term is usually 10 to 20 years, with a draw period and a repayment period.

A HELOC may offer more flexibility and lower initial costs than a jumbo reverse mortgage, but it also requires you to have a good credit score and a sufficient income to qualify and repay the loan. Additionally, you will have to pay closing costs and fees, which may be similar to or higher than a jumbo reverse mortgage. Moreover, you will have to deal with the risk and uncertainty of a variable interest rate, which may increase over time.

A cash-out refinance

This is a type of loan that lets you replace your existing mortgage with a new one, and get the difference in cash. You will have to make monthly payments to the lender, consisting of principal and interest. The interest rate on a cash-out refinance can be either fixed or variable, and the loan term can be shorter or longer than your original mortgage.

A cash-out refinance may offer a lower interest rate and a higher loan amount than a jumbo reverse mortgage, but it also requires you to have a good credit score and a sufficient income to qualify and repay the loan. Additionally, you will have to pay closing costs and fees, which may be similar to or higher than a jumbo reverse mortgage. Furthermore, you will have to restart your mortgage amortization, which means that you will pay more interest over the life of the loan.

Pros and Cons of a Jumbo Reverse Mortgage

A jumbo reverse mortgage can be a useful financial tool for some high-value homeowners, but it also has some drawbacks that you should consider. Here are some of the pros and cons of a jumbo reverse mortgage:

Pros

• It can provide you with a large amount of cash that you can use for any purpose, such as paying off debts, covering living expenses, improving your home, traveling, investing, or leaving a legacy for your heirs.
• It does not require you to make any monthly payments to the lender, as long as you live in the home and keep up with the property taxes, insurance, and maintenance. This can improve your cash flow and reduce your financial stress.
• It does not affect your Social Security or Medicare benefits, since it is not considered income by the IRS. However, it may affect your eligibility for some need-based programs, such as Medicaid or Supplemental Security Income (SSI), so you should consult with a financial advisor before applying for the loan.
• It can protect you from the risk of losing your home to foreclosure, as long as you comply with the loan terms and conditions. If the loan balance exceeds the home value, you or your heirs will not owe anything more, as long as the loan is a non-recourse loan.
• It can give you more flexibility and control over your finances, since you can choose how to receive and use the money, and how to repay the loan. You can also change your payment option or access more funds, subject to the lender’s approval and fees.

Cons

• It can be more expensive and complicated than a HECM, since it is not regulated or insured by the FHA or any other government agency. The interest rates, fees, and loan features may vary widely by lender and by loan product, so you will have to shop around and compare different options carefully.
• It can reduce your home equity and your net worth, since you will owe interest and fees on the loan balance, which will grow over time. This can limit your future financial options and your ability to leave a legacy for your heirs.
• It can affect your tax situation, since the interest and fees on the loan are not deductible until you repay the loan or sell the home. Moreover, the loan proceeds may be subject to income tax, depending on how you use them and how long you live in the home. You should consult with a tax professional before applying for the loan.
• It can impose some restrictions and obligations on you, such as living in the home as your primary residence, maintaining the home in good condition, paying the property taxes, insurance, and maintenance, and informing the lender of any changes in your status or situation. If you fail to meet these requirements, the lender may declare the loan due and payable, and you may lose your home to foreclosure.
• It can affect your family and your heirs, since they will have to deal with the loan repayment or the home sale when you pass away or move out. They may not be able to inherit or keep the home, unless they can pay off the loan balance or refinance the loan. They may also have to pay taxes on the loan balance or the home value, depending on the circumstances. You should discuss your plans and expectations with your family and your heirs before applying for the loan.

How to Choose a Jumbo Reverse Mortgage Lender

If you decide that a jumbo reverse mortgage is right for you, you will have to find a reputable and reliable lender who can offer you the best deal for your situation. Here are some tips on how to choose a jumbo reverse mortgage lender:

1. Do your research: You should learn as much as you can about the jumbo reverse mortgage market, the available loan products, the current interest rates, and the average fees and costs. You can use online resources, such as websites, blogs, forums, reviews, and calculators, to get information and insights from experts and consumers. You can also contact the National Reverse Mortgage Lenders Association (NRMLA), which is a trade association that represents the reverse mortgage industry, to get referrals and recommendations.
2. Compare different lenders: You should shop around and compare different lenders and their loan offers, using the same criteria and assumptions. You should look at the interest rates, fees, loan features, customer service, reputation, and reviews of each lender. You should also ask for a loan comparison and a TALC disclosure, which will show you the estimated costs and payments of the loan over time. You should not rely on the first offer or the lowest offer, but rather on the best offer that meets your needs and preferences.
3. Negotiate the best deal: You should try to negotiate the best deal with the lender that you choose, by asking for discounts, waivers, or reductions on the interest rates, fees, or loan features. You should also ask for a written confirmation of the loan terms and conditions, and review it carefully before signing it. You should not hesitate to ask questions or seek clarifications, if you have any doubts or concerns.
4. Seek professional advice: You should seek professional advice from a trusted and qualified financial advisor, tax professional, or legal counsel, before applying for the loan. They can help you understand the risks and benefits of the loan, the tax implications, the legal obligations, and the impact on your family and your heirs. They can also help you evaluate your financial situation and your goals, and advise you on the best course of action.

Conclusion

A jumbo reverse mortgage is a type of loan that lets you borrow more than the limit of a traditional reverse mortgage, using your high-value home as collateral. It can provide you with a large amount of cash that you can use for any purpose, without having to make any monthly payments to the lender. However, it can also be more expensive and complicated than a traditional reverse mortgage, and it can reduce your home equity and your net worth over time.