Home Equity Conversion Mortgage (HECM) and proprietary reverse mortgages are two types of reverse mortgages. HECM is a government-insured reverse mortgage (insured by FHA), while proprietary reverse mortgages are not insured by the government (FHA). Proprietary reverse mortgages are offered by private lenders and are designed for high-value homes. They are not subject to the same regulations as HECMs, and loan limits are not capped by the government.
Both the HECM and the proprietary reverse mortgage are products designed to assist borrowers of retirement age and have many similarities. There are also some distinct differences. Both are enumerated below.
Similarities:
- Neither product requires mortgage payments on the outstanding balance.
- Both products are available with a fixed rate or an adjustable rate option.
- Both products have a variety of ways to receive loan proceeds: lump sum, term payments, line of credit, or a combination of these methods.
- Both products are non-recourse loans1.
- Available loan amounts on both products are determined by the combination of the age of the youngest eligible borrower2, the value of the home, and current interest rates.
- Both loans are in effect until the borrower sells the home, no longer permanently resides in the home, or passes away (Maturity event)3.
- The homeowner retains ownership of the home.
- The loan proceeds can be used at the borrower’s discretion.
- Both programs have minimum age requirements and have specific guidelines for spouses2
- Upon death of the homeowner(s), the home is passed on to the heirs in the same way as if there was not a reverse mortgage in place.
- The loan is secured by the home. When the home is sold, the loan balance and accrued interest is paid off, and the balance of the sale proceeds go to the owner.
- The loan balance plus accrued interest gets paid off when a maturity event transpires3.
Differences:
- The minimum age requirement for HECM is 62 years old, while proprietary products are generally 60 years old, with certain options as low as 55 years old4.
- HECM loan limits are restricted by FHA as the maximum claim amount5, while the maximum loan amount on the proprietary products is up to $4,000,000.
- The HECM charges an up-front mortgage insurance premium which is 2% of the maximum claim, and proprietary products do not charge an up-front mortgage insurance premium.
- HECM has a monthly mortgage insurance premium of .5%, while proprietary products do not charge a monthly mortgage insurance premium. Some proprietary products have a nominal monthly service fee ($20).
- The line of credit and growth feature on the HECM continues for the life of the loan. The proprietary products have a limited window on the line of credit access, currently 10 years.
- The growth feature on the HECM line of credit is the interest rate on the loan plus monthly mortgage insurance premiums, whereas the proprietary product is fixed at .5%.
- Different limitations on up-front distribution amounts exist for certain combinations of features, e.g., up-front distribution with a line of credit.
Many varieties of reverse mortgages are available to suit a variety of borrowers’ needs. Obtaining a clear understanding of a borrower's situation alongside a detailed knowledge of the various options are essential attributes for your loan officer. We here at Watermark Capital are experts in the field and are available to assist you in understanding your options and help you achieve your financial goals in retirement.
1 See Non-Recourse Nature of a Reverse Mortgage.
2See Spouses and Reverse Mortgages.
3 See What to do when the loan comes due. (Coming: 7/30/2024)
4 See Additional Solutions with Proprietary Product. (Coming: 7/30/2024)
5See HECM Defined.
