Residential Magazine

The Wealthy Use This Loan to Thrive

Jumbo reverse mortgages can be a sophisticated financial tool for savvy borrowers

By Jesse Allen

The reasons, in many cases, were more aspirational than needs-based: Buy an investment property or a vacation home. Provide children with an early inheritance. Create a college fund for grandchildren.

A group of 250 high-value homeowners described in a survey for AAG Advantage why they chose to obtain jumbo reverse mortgages. Originators can boost their business by understanding the motivations of borrowers who choose these types of nontraditional products.

By anyone’s definition, the borrowers in the survey were well-off — with an average age of 77, net worth of $1.7 million and a FICO score of 729. They clearly were using their jumbo reverse mortgage as a savvy and sophisticated financial tool to not only survive, but to thrive.

Jumbo reverse mortgages are a lot like traditional reverse mortgages. If you are 62 or older, and own and live in your home as your primary residence, you can borrow against it and don’t have to repay what you borrow until you sell the home, move or die.

One difference between these loans is that most reverse mortgages are insured by the Federal Housing Administration, while jumbo reverse mortgages are backed by lenders. The biggest difference between the two loans is the amount of cash the homeowner can access. For a reverse mortgage, the value of the home on which the loan is based can’t exceed $726,525. For a jumbo reverse mortgage, however, the value of the home can go as high as $10 million.

This larger amount gives jumbo reverse mortgage borrowers a lot more discretion in how they choose to use their equity. Let’s go inside the numbers and look more closely at some of the ways affluent homeowners are using jumbo reverse mortgages to create a better retirement. The respondents in the AAG Advantage survey have a net worth of roughly $750,000 to $2 million, so they are well-off but not super wealthy.

Profits over panic

In a market downturn, instead of selling off a portion of their stock portfolio to maintain cash flow, the high-value homeowner can use proceeds from their jumbo reverse mortgage to ride out market volatility. When the market rebounds, they can resume drawing income from their investments.

Just look back as recently as December 2018 to see the wisdom of this strategy. The S&P 500 fell 9.6 percent that month, the worst December in the index’s history since the Great Depression year of 1931.

Yet in January 2019, the market snapped back, recording a 7.9 percent gain, the best January performance in more than 30 years. Investors who panicked when the market officially entered bear-market territory (a 20 percent decline off the market peak) on Dec. 24, 2018, and sold off all or a portion of their stocks, missed out on one of the all-time great stock-market rallies.

If these same investors had a jumbo reverse mortgage in place, they would not have been subject to the mercies of a whipsawing market. They could have avoided a panic-fueled sell-off and retained their investments, proving the old adage true once again — that it’s time in the market, not timing the market, that produces the best overall results for investors.

Preserving wealth

Here’s a way borrowers are using jumbo reverse mortgages to preserve wealth: Say a couple bought their home 30 years ago in a modest, middle-income neighborhood that has since gentrified. They paid $250,000 for it and then, one day, a real estate agent knocked on their door and told them similar homes on their street were going for $2 million.

Were they to sell their home, they would register a large capital gain, likely incurring thousands of dollars in taxes — even with the home-sale exemption of $250,000 for individuals or the $500,000 exemption for married couples filing jointly.

Of course, if they didn’t sell, they wouldn’t incur the tax bite, but neither would they gain access to and be able to enjoy any of the equity they had built up over the years. Their home equity would remain locked up. They could apply for a refinance, but that would mean an entirely new mortgage with new rate-and-term payments. And, if the borrowers are no longer working, qualifying may be more difficult.

By taking out a jumbo reverse mortgage, they could have eliminated their mortgage payments and received cash payments while continuing to live in their home. Upon the death of either spouse, the value of the home would step up to the current market value ($2 million), eliminating any capital gain. Before implementing any tax strategy — including this use of a jumbo reverse mortgage — always consult your tax adviser or estate attorney.

Clearly, when used strategically and for a precise purpose, a jumbo reverse mortgage can greatly expand retirement options.

Flexible and versatile

A jumbo reverse mortgage also is a far more flexible and versatile product than it was just a few years ago. Now, in addition to receiving tax-free loan proceeds as a lump sum, borrowers can access the funds as a line of credit, meaning they pay interest only on the portion they receive.

Unlike government-insured reverse mortgages, also known as home equity conversion mortgages or HECMs, jumbo reverse mortgages require no mortgage insurance premiums. With HECMs charging a 2 percent upfront premium and an annual 0.5 percent premium that is based on the loan balance, these savings can be quite substantial.

Although counseling is mandatory to qualify for a HECM, it is not for proprietary or private jumbo reverse mortgages. Counseling that mirrors HUD’s third-party requirements will most likely still be required by the lender, however, through company policy, to ensure jumbo or proprietary borrowers understand their rights, commitments and obligations under these loans.

Among these obligations — and this applies to reverse mortgages as well — jumbo reverse mortgage borrowers must continue to maintain their home, pay their property taxes and homeowner’s insurance, and meet their loan terms.

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Mortgage originators should realize how the jumbo reverse mortgage loan can offer clients greater leverage and more options for preserving and expanding wealth. It’s a financial tool well worth exploring.


  • Jesse Allen

    Jesse Allen is the executive vice president of alternative distribution at AAG. In this role, Allen is accountable for vision, strategy and execution for the company’s national field sales and wholesale mortgage originations business. Allen has 30 years of experience in financial services across mortgage, consumer and business banking. He earned his bachelor’s degree in business administration from Pace University in New York, graduating summa cum laude. 

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