Are you thinking about taking out a reverse mortgage?
Have you heard the word ‘proprietary’ thrown around, and wonder what the differences are between a ‘regular’ and ‘proprietary’ reverse mortgage?
Read on to learn about what those differences are, and what you should know when thinking about whether any reverse mortgage is right for you.
In this overview, you’ll learn about the following topics:
- What does ‘proprietary’ mean?
- What is a ‘regular’ reverse mortgage?
- What is a ‘proprietary’ reverse mortgage?
- Maximum reverse mortgage proceeds
- Why would I bother with a ‘regular’ reverse mortgage if I can get more money otherwise?
- The details
What does ‘proprietary’ mean?
When looking over the options you have enabling you to tap into your home’s equity through a reverse mortgage, you may see some companies offer what they call “proprietary” reverse mortgages.
This could lead you to naturally ask yourself what the real differences are between one of these, and the regular reverse mortgages that you hear about online and see on TV commercials.
Before we get into the proprietary part, let’s quickly refresh on what a regular reverse mortgage is.
What is a ‘regular’ reverse mortgage?
A normal, non-proprietary reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), allows a senior homeowner that’s at least 62 years of age to borrow against the value of his or her home, receiving that loan proceeds either through regular payments, a single lump sum, a home equity line of credit, or sometimes a combination of more than one of these.
These regular reverse mortgages are federally-insured by the United States government, and act as non-recourse loans, meaning the amount a borrower will owe at the time the loan comes due can never exceed the home’s value at the time of sale.
Because these reverse mortgages are government-insured, the government places certain restrictions on the loan’s conditions that must be met if the loan is to be approved by the agency that oversees it, in this case the Federal Housing Administration (FHA).
One of those limits is the amount of money that can be loaned through a HECM reverse mortgage, which as of 2020 is capped by the agency at $765,600.
Government-insured reverse mortgages are regulated by the Department of Housing and Urban Development, which sets boundaries on much money a borrower can receive from the loan proceeds, while also requiring potential borrowers to go through mandatory counseling so that they know all the facts surrounding this product before entering it.
What is a proprietary reverse mortgage?
A proprietary reverse mortgage provides the same basic concept of tapping into the equity of your home in several different ways, but it takes the government out of the equation.
This can be both a good and bad thing depending on your situation.
For instance, while the money you could receive in loan proceeds could potentially be much higher than a regular reverse mortgage offers, the loan itself also lacks protection from the government and instead solely relies on the rules of the lender.
Lenders make their own loan determinations when originating proprietary reverse mortgages.
The qualifying amount of loan proceeds is still, like a regular reverse mortgage, based on the home’s appraised value.
However, because these loans aren’t restricted by the limits on proceeds that the government places on regular reverse mortgages, proprietary reverse mortgages can have much higher limits that can stretch, for some homes, into the millions of dollars.
Therefore proprietary reverse mortgages are sometimes referred to as “jumbo” reverse mortgages, as most borrowers tend to be seniors with home values that can be worth more than the government’s limit, and sometimes well beyond it.
Maximum reverse mortgage proceeds
- ‘Regular’ reverse mortgage (HECM) – Up to $765,600 (FHA Lending Limit for HECM Loans)
- Proprietary reverse mortgage – Not limited, can run into millions of dollars (depending on property value)
Why would I bother with a regular reverse mortgage if I can get more money from a proprietary product?
For most people, the amount of money they can get from a loan is a primary factor. Your decision, though, should take several considerations into account.
For instance, since Mortgage Insurance is not a requirement for a proprietary reverse mortgage, lenders have the option of charging higher interest rates, and typically offer lower loan-to-value ratios than HECMs do.
It will likely be a good idea for potential borrowers to learn as much as they can through the required counseling that often comes with both traditional and proprietary reverse mortgages before entering into a transaction.
Counseling helps to minimize the possibility of being fiscally blindsided later by something a borrower may not have thought of in the planning phase.
While traditional HECM reverse mortgages require counseling by law, most proprietary options have chosen to mimic the HECM in requiring counseling even if lenders aren’t legally compelled to do it.
Proprietary vs HECM
Government Insured HECM VS Proprietary
Government HECM Proprietary
Lending Limit $765,600 $4,000,000
Payout Options Lump Sum
Line of Credit
(Guaranteed for life)
Line of Credit (Maximum 10 year draw period)
Lump Sum Limitations YES - 60% of available proceeds within first 12 months NO
Mortgage Insurance Yes - 2% Upfront and .50% ongoing NO
Line of Credit Guaranteed Growth Rate YES Max 7 Years
Non Recourse YES YES
Property Types Single Family Residence, FHA Approved Condo, PUD, 2-4 Units Single Family Residence, FNMA Warrantable Condo, PUD, 2-4 Units
Special Approval for Condominium YES NO
Jumbo & Proprietary Rates
Fixed Rate Adjustable Rate Lending Limit
4.99% (5.35% APR) 5.92% (3.99 Margin) $4,000,000
5.75% (6.00% APR) 6.18% (4.25 Margin) $4,000,000
5.875% (6.00% APR) 6.43% (4.50 Margin) $4,000,000
5.95% (6.125% APR) 6.68% (4.75 Margin) $4,000,000
6.75% (6.875% APR) 6.93% (5.00 Margin) $4,000,000
Jumbo APR Illustration: Assumes $1,000,000 loan amount, includes standard 3rd party closing costs.
Adjustable Rate Payment Options: Lump Sum, Line of Credit, Term.
Index: 3-Mo. Libor
Lifetime Cap: 3% Over Start Rate
When shopping around for a proprietary reverse mortgage, interest rates and fees should most definitely be compared.
If you’re entertaining the idea of a proprietary reverse mortgage but are reasonably certain that your home’s value is under the HECM lending limit of $726,525, take a closer look at traditional government-insured options and all the other associated expenses.
You can also take advantage of ARLO’s Calculator, the All Reverse Loan Optimizer, which can help you to shop around for the best rates and products to find one that fits your own financial situation best.
It’s also a good idea to talk with your trusted friends and family while deciding if a reverse mortgage, either regular or proprietary, is a good fit.
That way, they can advise you on what your best path forward could be in funding your retirement years.
Every individual borrower can have a very different situation.
Those closest to you can probably offer more personalized advice before you sign on the dotted line.
Top 5 FAQs
What is a proprietary reverse mortgage?
A proprietary reverse mortgage is a reverse mortgage loan that is not insured by the Federal Government under the HECM program.
When is a proprietary reverse mortgage better than a HECM?
There are several instances when a proprietary reverse mortgage can be better for a borrower than a HECM loan. Most often it is due to the property value. The current limit for 2020 for value on a HECM loan is $765,600 and there is no limit on the value for proprietary loan programs. Proprietary programs can have loan amounts as large as $4 to $5 million. Other instances include property types not eligible for FHA and underwriting guidelines that also differ from FHA.
Is there mortgage insurance on a proprietary reverse mortgage?
No. Proprietary reverse mortgages are not insured by the government and therefore there are no mortgage insurance premiums required.
Do proprietary reverse mortgages have higher closing costs than a HECM?
In most instances the answer is no, because there are no mortgage insurance premiums. While most proprietary loans have significantly lower costs than a HECM loan, there are some rare instances where the costs would be higher. Those rare instances only occur at very high property values.
Do proprietary reverse mortgages have higher interest rates than a HECM?
On average yes. Currently as of January 2020, HECM programs have rates from the low 3% range to the low 5% range. Proprietary programs have rates from 4.99% to the low 7% range. The lower the rate on proprietary products, the lower the loan to value you can borrow.