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Understanding Jumbo Reverse Mortgages

jumbo reverse mortgages

Are you a retiree looking to tap into your home equity to fund your retirement? If you live in a high-value home (worth at least a million dollars), a traditional mortgage might not give you the most value.

Traditional reverse mortgages are limited to $726,525 in 2019. If your property could pay you more, you may need to look into a jumbo reverse mortgage. Jumbo reverse mortgages share many similarities to traditional reverse mortgages, but also have some important distinctions.

There are not many lenders that offer jumbo reverse mortgages. Prior to the 2008-2009 housing crash, there were several proprietary reverse mortgage products, but following the crash the market dried up with the exception of these two major players.

This article explains the benefits and risks of taking out a jumbo reverse mortgage.

What is a jumbo reverse mortgage?

A reverse mortgage is a loan to convert some of your home’s equity to cash. Once you take out a reverse mortgage, you don’t have to make monthly payments to pay it back. A reverse mortgage is only available to seniors age 62 or older.

You won’t make payments on a reverse mortgage, but you will still have to pay property taxes, insurance and home maintenance costs. You can repay the reverse mortgage by selling the house.

Over time, the amount you owe on a reverse mortgage goes up. This is because interest and fees are added to the loan balance each month. You can use the cash from a reverse mortgage for any purpose, including paying off other debts and boosting your nest egg.

The majority of reverse mortgages are loans guaranteed by the Federal Housing Administration (FHA). Reverse mortgages guaranteed by the FHA are called Home Equity Conversion Mortgages (HECM).

Traditional reverse mortgages face a loan limit of $679,650. Homeowners with home equity worth more than $679,650 cannot use an FHA guaranteed reverse mortgage to access all the value in their houses — and that’s where jumbo reverse mortgages come into the picture. Jumbo reverse mortgages allow borrowers to access up to $6 million worth of home equity. Since jumbo reverse mortgage lenders aren’t FHA guaranteed, lenders don’t have to follow FHA guidelines about loan size.

Aside from issuing larger loans, most jumbo reverse mortgage lenders follow other FHA guidelines. Importantly, most lenders offer robust borrower protections that mimic FHA protections. As best practice, most companies that offer proprietary reverse mortgages emulate the same consumer protections that are found on FHA guaranteed reverse mortgages.

For example, most jumbo reverse mortgages are “non-recourse” loans. If your loan balance ends up being more than the value of your home, you do not have to pay the difference. The lender has to absorb the loss on their own. On top of that, co-borrowers or eligible non-borrowing spouses (who must be married at the time of the loan origination, and be listed on the loan documents) can stay in the house as long as they are physically able. As long as you continue to pay taxes, insurance or maintenance costs, you should be able to stay in your home

What makes jumbo reverse mortgages different

Larger funding limit: While traditional reverse mortgages limit borrowers to loans up to $679,650, jumbo reverse mortgages allow borrowers to borrow up to $6 million. The exact amount you can borrow depends on the value of your house, your age, and how much you currently owe on the home.

Receive funds right away: When you take out a jumbo reverse mortgage, you get the full proceeds of the loan right away. It’s up to you to make the funds last throughout your retirement. By contrast, traditional reverse mortgages don’t allow you to take all the proceeds at once. Instead, loans can be structured as a line of credit, or a monthly disbursement of funds.

Interest rates: Interest rates on jumbo reverse mortgages tend to be quite a bit higher than rates on FHA guaranteed reverse mortgages. Unless your house is worth a million dollars or more, it tends to make more sense to go with FHA, because the proceeds are similar and the interest rates are so much lower.

Fee structures: Reverse mortgages guaranteed by the FHA carry some hefty financing charges. The biggest charge is an upfront mortgage insurance premium (MIP) of 2% of the loan value. Borrowers also have to pay an annual MIP charge of 0.5% of the mortgage balance. Jumbo reverse mortgages don’t carry these insurance charges, but that doesn’t make a jumbo reverse mortgage a cheaper loan. Most jumbo reverse mortgage lenders will charge underwriting fees worth 1% to 2% of the house’s appraised value. Once you add up the fees, the upfront costs of jumbo and traditional reverse mortgages ends up being similar.

Protections not FHA guaranteed: As a best practice, jumbo reverse mortgage lenders extend borrowers the same protections as the FHA offers. For example, most jumbo reverse mortgages do not require you to pay the difference if the loan exceeds the house’s value. Additionally, most jumbo reverse mortgages allow co-borrowers and eligible non-borrowing spouses to live in the house indefinitely as long as taxes, insurance and maintenance remain paid. However, these protections are not federally mandated. Borrowers must ask lenders specifically about the consumer protections that the lender offers.

Jumbo reverse mortgage advantages

Access more value from home: Jumbo reverse mortgages allow borrowers to access up to $6 million of their home’s value; by contrast, FHA guaranteed reverse mortgages only offer loan balances up to $679,650. Jumbo reverse mortgages really start to make sense once you have a home with an appraised value of at least a million dollars. With smaller home value, you’ll probably find the the FHA guaranteed product is a better deal.

Allow borrower to eliminate payments on a larger mortgage balance: Jumbo reverse mortgages can be used to eliminate monthly mortgage payments while allowing retirees to stay in a high cost of living area. An FHA guaranteed reverse mortgage allows borrowers to refinance small mortgage balances, but jumbo reverse mortgage allows borrowers to refinance mortgage balances of several hundred thousand dollars or more.

No mortgage insurance premiums: Since jumbo reverse mortgage payments aren’t FHA-guaranteed products, borrowers don’t have to pay upfront or ongoing mortgage insurance premiums.

Generally non-recourse loan: As a best practice, most jumbo reverse mortgage lenders offer borrowers consumer protections that mimic the protections offered by the FHA. For example, most reverse mortgages are non-recourse loans— this means that neither you or your heirs will have to pay the difference if the loan value exceeds the home’s value.

However, this protection isn’t guaranteed. Do not assume that a jumbo reverse mortgage is a non-recourse loan. Ask your lender if the jumbo reverse mortgage is a non-recourse loan, and have them show you the part of the contract that explains that protection.

Fixed rate loans: Borrowers taking out jumbo reverse mortgages don’t need to worry about interest rate hikes. Right now, jumbo reverse mortgages are fixed rate loans. This means that your loan size will increase at a predictable rate.

Jumbo reverse mortgage risks

Must ask about consumer protections: Borrowers taking out jumbo reverse mortgages have to be careful. While most lenders offer robust borrower protections, without certain protections in place, jumbo reverse mortgages could be very risky. Before taking out a jumbo reverse mortgage, ask your lender whether you, your spouse (including an eligible non-borrowing spouse) or co-borrower will ever be forced to move out of your house based on the loan balance. Additionally, ask whether you or your heirs will have to pay any difference between your home’s sale value and the value of the loan.

Mortgage balance increases over time: One of the most important things for borrowers to understand is that with a reverse mortgage your mortgage balance is not decreasing. It’s increasing. Over time, it’s possible to owe more than what your house is worth. If you want to leave a house to family, you have to be careful with any kind of reverse mortgage.

Must pay taxes, insurance and maintenance: A jumbo reverse mortgage eliminates your monthly mortgage obligation, but you must continue to pay taxes, insurance and maintenance costs on your home. If you fail to make these payments, you could be forced out of your home.

Must take loan proceeds right away: FHA guaranteed reverse mortgages offer borrowers a monthly payment or a line of credit borrowing option. With jumbo reverse mortgages, those options aren’t available. All jumbo reverse mortgage borrowers have take the entire loan proceeds right away. You’ll have to be responsible to use those proceeds as needed throughout retirement.

Higher interest rates: Interest rates on jumbo reverse mortgages are currently almost 2% higher than loans on FHA guaranteed mortgages. The higher interest rates mean that your home equity disappears faster.

Finding a jumbo reverse mortgage

Finding a jumbo reverse mortgage is quite a bit more difficult than finding a traditional reverse mortgage. Fewer banks offer jumbo reverse mortgages, and the newest reverse mortgages are a relatively new financial product.

One way to find a jumbo reverse mortgage is to work directly with a Certified Reverse Mortgage Professional in your city. These professionals have extensive knowledge about the reverse mortgage marketplace, and can guide you towards your best option. It might also make sense to work with a U.S. Department of Housing and Urban Development (HUD) counselor, who can give guidance about both jumbo and traditional reverse mortgages.

Once you know that a jumbo reverse mortgage makes sense for you, you can find local lenders through LendingTree. If you want to work with nationwide jumbo reverse mortgage lenders, consider applying directly through the American Advisor Group or Finance of America Reverse.

Does a jumbo reverse mortgage make sense for you?

If your house is worth $1,000,000 or more, and you want to access your home’s equity, a jumbo reverse mortgage could make sense for you. It’s an excellent way to use your home’s value to fund part of your retirement. But before you start shopping, be sure to speak to a reverse mortgage specialist who you trust.