What are Jumbo Reverse Mortgages?
Reverse mortgages have become increasingly popular in recent years, as aging American homeowners look for effective ways to supplement their income. Through a typical reverse mortgage, borrowers are allowed to tap into a percentage of their home’s equity, up to a maximum of $625,500. Homeowners who wish to draw more than this amount must use a jumbo reverse mortgage instead (amount subject to change – speak with a loan consultant for the most up-to-date figures).
Before we get into the specifics of a jumbo reverse mortgage, let’s first look at how a regular reverse mortgage works. With a reverse mortgage, also known as a home equity conversion mortgage (HECM) if insured by the Federal Housing Administration, borrowers are able to draw money from a portion of their home’s equity, so they receive payments (either in a lump sum, monthly installments, line of credit or a combination of these) instead of making a monthly mortgage payment. The money drawn from a HECM can be used for just about anything. Many senior citizens find this to be a useful method for supplementing monthly retirement income, paying for major medical bills or funding nursing care for their spouse or other loved ones. There are no restrictions on how the money can be spent; however, most financial counselors and mortgage experts advise that a reverse mortgage should be used wisely and not for frivolous expenses.
With HECMs, borrowers can alternatively choose to draw one lump sum instead of receiving recurring payments. The decision on how a borrower will receive their money should be made carefully, after reviewing all the risks and obligations with a qualified mortgage counselor.
The money received through a reverse mortgage is not required to be paid back until the home is no longer the borrower’s primary residence. This can occur through the sale of the home, the home becoming a second home, vacation home or rental property, or through the borrower’s death. After any of these things occur, the loan must be paid back, with interest.
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About Jumbo Reverse Loans and How They Vary from HECM Loans
A jumbo reverse loan works in the same manner as a reverse mortgage with conforming loan limits. The primary difference is that the borrower’s equity can be higher. The second difference is that a jumbo reverse mortgage may allow borrowers to tap into a smaller percentage of their equity when compared to standard HECMs. Additionally, interest rates on jumbo reverse mortgages are usually 1%-2% higher than a conventional HECM.
Jumbo HECMs are not very common, as very few people have a home with enough equity to make a jumbo reverse mortgage make sense. In fact, unless the homeowner has a home that is valued at more than $2.5 million (25% of $2.5 million is $625,500), a borrower would most likely save money by choosing a typical HECM over a jumbo option. Be that as it may, every situation is different and if you’re considering a reverse mortgage of any kind, it’s best to speak with a qualified mortgage counselor or reputable mortgage lender for personalized advice.
Jumbo Reverse Mortgages At-A-Glance (figures are subject to change):
- Borrowers able to draw more than $625,500 from their home’s equity.
- Borrowers only able to access up to 25% of their home’s equity
- Interest rates slightly higher for jumbo reverse mortgages (1%-2% more than a conventional reverse).
- Unless your home is valued at more than $2.5 million, it may not be worth it to do a jumbo reverse mortgage (talk to your lender for details).
- Not all lenders offer jumbo reverse mortgages. Because they are so rare, you may have to shop around before you find a bank that offers this specialized mortgage product.
- Like conventional reverse mortgages, the borrower must be 62 or older to qualify and must own their home outright or owe very little on the existing mortgage.
- Like with conventional reverse mortgages, the borrower will not be required to pay off the mortgage until the home is no longer the borrower’s primary residence.
- Like with conventional reverse mortgages, jumbo reverse borrowers will still be responsible for paying mortgage insurance premiums, property taxes and other associated mortgage fees. (Make sure you are fully aware of your obligations before signing up for a reverse mortgage of any kind).
Understand that there are certain alternatives to reverse mortgages and in some cases, other options may make more sense. To determine the best course of action, carefully evaluate all options and get advice from a financial expert or mortgage professional.