Q: I was looking into a Jumbo Reverse Mortgage and was told by my financial advisor that they are not allowed in some states. What is your opinion on this? Also, how many states do these types of mortgages actually break down? Thanks!
A: You should not be unfamiliar with jumbo reverse mortgages but may be unfamiliar with the different types of such loans. Basically, a jumbo reverse mortgage allows homeowners with much higher property values to access large home equity amounts that may exceed the federal limit of a typical HECM. This type of loan can also be referred to as a “second mortgage” in the United States. While it is true that the federal government limits the number of such loans, homeowners who have equity in high-value homes can enjoy larger loan amounts than otherwise possible.
In general, the maximum amount of money that can be borrowed with a jumbo reverse mortgage varies according to the home value involved. The maximum loan amount is based on a percentage of the difference between the home value and the homeowner’s home-loan principal. As you can see from the question above, the maximum amount can be quite large, in some cases up to nearly twice the value of the home. This means that the homeowner will pay interest on the loan for the full amount of the loan term even if they have no funds left over to cover their monthly mortgage payment.
This is good news for those who own high-end properties and would otherwise be paying enormous interest rates. However, while this advantage is enjoyed, there are some disadvantages as well. One of the main disadvantages is that there is no asset protection available to borrowers who have a jumbo reverse mortgage. Borrowers cannot use their home equity to secure any loan, as their home is used as collateral.
This issue has recently been addressed by several new mortgage lenders who now offer a form of a reverse mortgage to those who wish to use their home equity. These lenders do not need to provide this protection and many actually prefer it. With these new types of mortgages, homeowners can choose to pay a higher interest rate, or they can choose to pay a lower interest rate but then agree to pay an annual fee. Some of the new lenders allow both options.
In general, the newer mortgage products are better suited for seniors who are more at risk of defaulting on their loans. Some of these mortgages have additional protections, such as provisions that allow seniors to borrow against their non-borrowing spouses’ equity. Another benefit is that the government may offer some or all of these protections, especially if the home has been purchased through FHA or HUD mortgage loans. An individual senior may be able to obtain a jumbo reverse mortgage in situations where the senior borrower is experiencing financial difficulties.
Usually, there are two main disadvantages to jumbo reverse mortgages. First, the monthly payments can be substantial, and second, they usually only provide enough flexibility to those with excellent credit. Most borrowers seeking these types of loans are seniors with decent credit. Many homeowners do not qualify for traditional mortgages because of their low credit score. Those who do qualify for conventional mortgages often do not have enough appreciation to make a sizable down payment. In addition, since most of the equity is used for the loan itself, the home value usually does not increase enough to pay off the loan.
The upside to jumbo reverse mortgages is that seniors can gain access to their home equity when they have the means to do so. Seniors who own high-value homes, such as second homes, are typically more capable of paying back a larger loan than those who own a lower-valued home. Furthermore, borrowers will typically be able to obtain better terms on their reverse mortgages. Borrowers can usually get longer repayment periods or lower interest rates. When all of the facts are considered, it makes sense for borrowers to consider using a jumbo reverse mortgage.