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Updated on Friday, January 18, 2019
If you’re a homeowner aged 62 or older with considerable equity in your home, whether because you’ve paid down your mortgage or because your home is worth much more now than when you bought it, you might consider pursuing a jumbo reverse mortgage to access some of that equity. The reverse mortgage was originally created to help older homeowners access the equity they had built up on their home. The number of these mortgages ballooned through 2009, until the fallout of the financial crisis brought them down sharply. As a result of the subprime mortgage crisis, in which many borrowers defaulted on their loans, the reverse mortgage got a bad reputation. But for the right homeowner, this type of loan can still be a good fit.
Most reverse mortgages are part of the Home Equity Conversion Mortgage (HECM) program. They are offered to homeowners aged 62 and older and are administered by the U.S. Department of Housing and Urban Development (HUD). They are federally insured, but if you want a larger loan that surpasses the current $726,525 FHA home-value limit, you might want to look at a jumbo reverse mortgage.
“With a reverse mortgage, the lender sends you money every month rather than you paying the lender every month,” said Tendayi Kapfidze, chief economist at LendingTree, which owns MagnifyMoney, adding that borrowers can also often choose to receive a line of credit or a lump-sum payment.
Explaining the jumbo reverse mortgage
Jumbo reverse mortgages provide bigger loans than regular reverse mortgages — often in the range of millions of dollars. These loans work well for older homeowners with high-value properties who want to stay in their homes and supplement their income without taking on additional debt. Jumbo reverse mortgages provide a lump sum at a fixed interest rate, secured by a home’s value. When the borrower either sells his or her home or dies, the loan becomes due.
Because jumbo reverse mortgages are private loans that aren’t FHA-guaranteed, they aren’t protected by federal standards in regards to interest rates and various consumer protections, and thus, there is potentially more risk to the borrower. It’s important to shop around and read and understand the loan terms carefully. “With jumbo reverse mortgages, there’s more variation in the loan terms between lenders — make sure you understand those variations,” Kapfidze said.
How jumbo reverse mortgages differ from other reverse mortgages
- Jumbo reverse mortgages have higher interest rates than standard reverse mortgages
- Borrowers of jumbo reverse mortgages receive all funds at once
- FHA-guaranteed reverse mortgages require a 2% upfront mortgage insurance premium (MIP) and 0.5% of the mortgage balance annually. Jumbo reverse mortgages don’t require this, but most lenders charge 1% to 2% of the house’s appraised value in underwriting fees
- Jumbo reverse mortgages don’t necessarily provide FHA protections; it’s very important to understand the loan terms
Benefits of a jumbo reverse mortgage
- No monthly payments
- Can access much more home value than with a standard reverse mortgage, making this a good option if your home is valued at $1 million or more
- No MIP required
- Typically jumbo loans are non-recourse loans, meaning that neither you nor your heirs will have to pay the difference if the loan value exceeds the home’s value — but because these loans aren’t FHA-backed, you must make sure this protection is included in your loan terms
Risks of a jumbo reverse mortgage
- Mortgage balance increases over time — it’s possible, at some point, to owe more than your home is worth
- Higher interest rates
- Must pay property taxes, homeowners insurance and homeowners association dues, otherwise you will default on the loan
- Getting a lump sum up front might make it harder to pay the taxes (and hold onto the money) than if you were to receive monthly payments
- Because the loan becomes due when the house sells or the borrower dies, this option might not be right for homeowners who want to keep their property in their family
How to get a jumbo reverse mortgage
Homeowners interested in pursuing a jumbo reverse mortgage must first find a lender who offers the more rare jumbo option. Start by talking to a financial adviser or other mortgage professional. You likely will need a good credit score, an appraisal of your home and an excellent track record of paying property taxes and home insurance.
Find the right fit for you
Make sure to shop around — because these are private transactions that aren’t federally backed, terms vary widely. You want to make sure to read all terms closely and get the right fit. Treat it as just one option, and think it through. “You have to read the fine print in every case, but especially here, where it’s an entirely private transaction,” Kapfidze said.
If you are an older homeowner, your home is worth at least $1 million, you plan to live there for years to come, you don’t intend to leave your home to family or you’d like to access some of your home’s worth for living expenses or health care costs, the jumbo reverse mortgage might be a good option for you.