HECM vs. the Jumbo Private Reverse Mortgage
There are many different types of reverse mortgages available, each with their own lenders, fee schedules, interest rate structures, and more. Two of those mortgage types, the HECM and jumbo reverse mortgage, each offer specific advantages to meet unique borrowers’ needs. Not everyone will benefit from the same type of reverse mortgage, so learning about the different types of mortgages can help the consumer make smarter choices.
HECM stands for Home Equity Conversion Mortgage. This type of reverse mortgage accounts for a vast majority of the marketplace, about 90%, and is therefore the most popular type reverse mortgage by far. This reverse home mortgage is intended for people whose homes have a lower appraised value, generally under the $400,000 mark in appraised value.
HECM loans are federally insured by the FHA, or the Federal Housing Administration. Much as the federal government insures student loans, these loans are guaranteed by the federal government, alleviating the risks for lenders. The federal government regulates HECM loans, capping fees and interest rates.
For homeowners with homes valued at more than $500,000, the traditional HECM loan may not offer the best solution. The amount that can be borrowed is less than the value of the house, meaning that homeowners won’t be able to access the full equity in their homes, despite having homes with higher appraised values. For these people, a new type of reverse mortgage is being offered.
These so-called “jumbo” loans, also known as conventional reverse home mortgages, are private reverse mortgages that often work much like a federally insured bank reverse mortgage. The same “non-recourse” rules apply, as do the rules about age and borrowing potential. The difference is that seniors with homes of higher value are able to take out more of the equity of their home in their reverse mortgage. For example, a person with a home at an appraised value of $1 million would still have a significant cap on the amount of money they would be able to draw from a HECM reverse mortgage. However, with a jumbo reverse mortgage, the amount that homeowner could draw can be at least double that available under an HECM plan.
The rest of the aspects of a jumbo reverse mortgage are similar to the HECM mortgages. Homeowners still won’t have to pay back the mortgage until they’ve permanently left the property or else sell the home. However, the jumbo reverse mortgage doesn’t have the same federal protections—for example, fee caps and interest caps—as the HECM reverse mortgage. In these cases, the smart consumer will check all the fine print and find out the mortgage’s interest rate and fee structure before signing on the dotted line. Of course, most reverse mortgage lenders know that they have federal competition, and make their rates competitive.