In the past, reverse mortgages were usually used as a last resort option for retired homeowners who had exhausted most of their retirement funds, but with the implementation of proprietary products like jumbo reverse mortgages, these loans are now being used by higher net worth people as a means of retirement planning.
Historically, individuals with homes valued over the federal loan lending limit of $625,500 typically did not fit the profile of traditional reverse mortgage borrowers—lower-income borrowers using a reverse mortgage as a last resort lifeline to remain in their homes.
But now, stricter underwriting standards and the reemergence of proprietary jumbo products in recent years have increased the appeal of reverse mortgages among higher net worth homeowners who are looking for more sophisticated ways to leverage housing wealth in retirement planning.
In recent years, the reverse mortgage industry has seen the introduction of a new era of jumbo products with the launch of Finance of America Reverse’s HomeSafe product in 2014 and the AAG Advantage jumbo from American Advisors Group in 2015. Prior to these products, Generation Mortgage Company offered a proprietary jumbo reverse mortgage.
Jumbo loans are slowly picking up interest, but similar to a standard Home Equity Conversion Mortgage (HECM), there needs to be more education to the public, explains Martin Lenoir, chief marketing officer at AAG.
“As we see more senior homeowners using the jumbo loan product, as they hear about their friends and family members who take out reverse mortgages and as we read about these stories in the media, perceptions will change and adoption will be on the increase,” he says.
AAG launched its proprietary jumbo product, the AAG Advantage, in September 2015, allowing seniors with homes valued up to $6 million to obtain a reverse mortgage. Through the product, qualified borrowers have the opportunity to borrow up to $3 million in loan proceeds.
These higher net worth clients who are seeking out jumbo reverse mortgages, because they are informed, know that home equity could benefit their overall comprehensive retirement planning strategy.
“The jumbo borrower has many planning options and may be tapping into home equity not because he or she has to, but because he or she wants to,” says Lenoir.
Because jumbo borrowers may not need the proceeds immediately, like many HECM borrowers do, or may not even be sold on the idea of a jumbo reverse mortgage, the sales cycle can be much longer, Lenoir explains.
“As compared with a needs-based buyer, this segment of homeowners doesn’t have an immediate urgency to apply for a loan,” he says.
People who are looking into jumbo reverse mortgage products are often aware of the benefits of the product, but there are many people out there who don’t know how much a jumbo reverse mortgage could help them to sustain their retirement.
Aside from sustaining longevity in retirement, jumbo reverse mortgages can be useful when the market is down and people don’t want to have to take money out of investments. Instead, as financial planning research has shown, they can leave their investments alone to grow over time and use the proceeds from a reverse mortgage to leverage their spending.
There is also the option of utilizing the proceeds from a jumbo reverse mortgage to defer drawing on Social Security until a later age and in turn, increasing monthly payments later in life, Lenoir explains.
“With savings, pensions and Social Security no longer providing enough to fund retirement longevity, it’s critical that home equity is a part of retirement planning,” he says.
To date, the AAG Advantage product is available via AAG’s retail channel in California, Connecticut, Florida, Illinois, Pennsylvania, Texas and Virginia. Last month, the company expanded the product to its wholesale division, though only in California.
Written by Alana Stramowski