Entertainer Ed McMahon is just one example of a common problem experienced by aging home owners with expensive properties: being house rich and cash poor. In particular, senior citizens who have built substantial equity in an expensive home may find themselves with a very valuable asset on paper, and yet struggling to stretch the household budget from week to week. For homeowners in this position, a jumbo reverse mortgage may be worth investigating.

Budget issues can be exacerbated by an expensive home, where upkeep costs and property taxes pose a hefty challenge. And yet, owners of the most expensive homes can't take much advantage of government-backed mortgages due to the relatively low loan amount limits of these products. This pushes them into what has traditionally been called the "jumbo" category. While fewer in number than government-backed loans, there are some jumbo reverse mortgage programs that can generate cash from the accumulated equity in an expensive home.

For expensive properties, perhaps the best way to think about the traditional use of reverse mortgages is as an alternative to downsizing. Often, as people age, they move into smaller, less expensive homes. Sometimes this is to reduce the effort of keeping up a larger place, but in many cases the move is made due to financial considerations. In the latter case, the home owners would prefer to stay in the property they have made their home, if given the choice.

A reverse mortgage provides this choice by lending the home owner money for eventual repayment from equity in the home. This repayment does not have to occur until the home owner dies, moves, or sells the home. Unlike the alternative of downsizing, reverse mortgages accumulate interest expense until the debt is repaid, but they also mean being able to stay in the home longer--possibly, for the rest of the home owner's life. Another alternative to a reverse mortgage would be a traditional home equity loan, but since credit rating is a factor and payments on these loans would begin almost immediately, this might not be an effective solution for a cash-strapped household.

Redefining Jumbo Reverse Mortgages

One barrier to jumbo reverse mortgage s in the past has been their limited availability compared with smaller Fannie Mae reverse mortgages or Home Equity Conversion Mortgages (HECMs) which are eligible for FHA insurance. A significant change in 2008 raised the ceiling on FHA-eligible reverse mortgages to $417,000 nationally, and as high as $625,000 in certain high-cost areas. The availability of FHA insurance for loans that would traditionally be classified as jumbo reverse mortgage s increases the availability of those loans, adds to the range of payment options (HECM reverse mortgages have a monthly allowance option), and can lower interest rates.

An additional benefit of the 2008 changes is a capping of origination fees on HECM reverse mortgages at $6,000. The larger the loan, the smaller this represents as a percent of principal, so this change is especially valuable for jumbo reverse mortgages which can conform with the new FHA limits.

Sources:

Courier Post Online

New Retirement.com