More Costly Private Loans

If you live in a home worth a lot more than HUD’s home value limit for the HECM program (currently $625,500), you may qualify for a larger loan amount from a proprietary plan than from a HECM. For example, in order to get a greater loan amount from a leading proprietary plan, a 75-year-old borrower would need to own and live in a home worth more than about $1,850,000. A 62-year-couple, on the other hand, would need a home worth more than  $3 million in order to get a larger loan amount from the proprietary plan. 

 

Even if you could get a larger loan amount from a proprietary plan, however, it might not actually provide you with more in total loan advances than a HECM would provide. As explained earlier, the amount of funds remaining available in a HECM creditline grows larger every month, and may do so at a rate that is greater than the one at which proprietary creditlines grow. So an initially smaller HECM creditline may provide more total cash over time than an initially larger creditline that grows at a lower rate.

 

Proprietary creditline funds generally do not grow at all or do so at a fixed rate. But that fixed rate is highly likely to be less than the rate at which HECM creditlines grow. So an initially smaller HECM creditline can provide more total cash over time than an initially larger creditline that grows at a lower rate.

 

Compared with HECMs, proprietary reverse mortgages typically offer lower upfront and monthly fees but charge much greater interest rates – as much as three percentage ponts (3%) greater. So the lower fees on a proprietary plan can be offset by its much higher interest rate, resulting in greater total costs for the proprietary plan.

A new type of proprietary reverse mortgage now being developed by some credit unions, however, may provide a clearly lower-cost alternative to HECMs. These plans would provide smaller loan amounts than a HECM, but would charge much smaller fees. 

The best way to compare a proprietary plan with a HECM is to use a side-by-side comparison produced by software that meets AARP’s model specifications for analyzing reverse mortgages. Information on obtaining these revealing comparisons is presented in the article on Choosing a Counselor.  

The most costly proprietary reverse mortgages have charged "contingent interest" in the form of a "shared equity" or "shared appreciation" fee. With a "shared equity" loan, the borrower owes a percent of a home's value when a loan is repaid. With a "shared appreciation" loan, the borrower owes a percent of any increase in the home's value since the loan was closed.

The earliest of these loans had the largest fees, up to 80% of a home's value or 100% of its appreciation. But all of the companies that initially offered these loans are either no longer in business or no longer offer these loans. Within the past year, however, new versions of “shared appreciation” plans have begun to appear. Although these plans may not be in the form of loans, their costs can be extremely high when home values grow substantially.