If you are looking for ways to use your home’s value during retirement, you may have already read about Home Equity Conversion Mortgages. These are government-backed loans that many seniors use.
But this program does not work for everyone.
Maybe your home is worth more than the government limit.
Or maybe you want different rules than what federal programs allow.
In such cases, private lenders offer another choice. This guide explains how these private options work, how they differ from government programs, and when they may or may not make sense for you.
Government Programs vs. Private Lending: The Basics
To understand private options, it helps to first know how they are different from government-backed loans.
The Home Equity Conversion Mortgage program started in 1988 and is insured by the Federal Housing Administration. It follows strict federal rules. These rules cover loan limits, interest rates, counseling, and borrower protections. One key benefit is that you will never owe more than your home is worth.
Private lenders work outside this system. Banks, credit unions, and mortgage companies use their own money instead of government insurance. Because of this, they can set their own rules, limits, and loan features. This allows them to help people who do not qualify under federal guidelines.
A simple way to think about it is this: government programs are standardized and tightly regulated, while private options are more flexible and customized.
Who These Private Options Are Best For
Most homeowners can use government-backed loans, but private options are helpful in certain situations.
High-value homeowners are the most common users. In 2024, federal programs usually cap lending around $1.15 million. If your home is worth $2 million or more, you can only borrow against part of its value through federal programs. Private lenders may allow borrowing based on the full home value.
Some younger homeowners also look at private lenders. Federal programs require borrowers to be at least 62 years old. Some private lenders accept applicants starting at age 55 or 60. This can help people who retire early or need funds sooner.
Homes that do not meet strict federal rules may still qualify with private lenders. Examples include historic homes, luxury condos, or properties with large land areas.
People who want specific loan features may also prefer private options. These lenders may offer different payment methods or repayment flexibility not found in federal programs.
Mortgage Discount Points: What They Are, How They Work
How These Loans Work in Practice
The basic idea is similar to a government-backed reverse mortgage.
You receive money from your home’s value without making monthly mortgage payments. The loan balance increases over time as interest adds up. Repayment usually happens when you sell the home, move out permanently, or pass away.
You still own your home. You must continue paying property taxes, homeowners insurance, and keep the home in good condition.
How much you can borrow depends mainly on your age and home value. Older borrowers can usually access a larger percentage of their home’s value.
Interest rates vary more than with government loans. Rates may range from about 6% to 10% or higher, depending on the lender and market conditions. Most rates are adjustable, though some fixed-rate options exist.
Money can be received in different ways:
- A lump sum for large expenses
- A line of credit to use as needed
- Monthly payments to support retirement income
Many people use a mix of these options.
Unlike government programs, private loans do not charge mortgage insurance. This saves money upfront, though higher interest rates may reduce that benefit over time.
Understanding the True Costs
Private loans typically cost more over all, so you should be aware of every fee.
Interest rates are often higher than government loans, usually by 1–2%. Because you do not make monthly payments, interest grows over time, which can significantly increase the loan balance.
Origination fees vary widely. Some lenders charge a percentage of the loan amount, while others reduce upfront fees but increase interest rates. Always look at the total cost, not just one fee.
Closing costs include appraisals, title insurance, escrow, and legal fees. These often range from a few thousand dollars to more for high-value homes.
Some lenders charge monthly servicing fees, which are added to the loan balance. Over many years, these fees can add up.
Some loans even carry early repayment penalties when the loan is paid off within the first few years.
The Approval Process
The approval steps are similar to other mortgages but with some differences.
Your age must meet the lender’s minimum requirement. If you are married, the younger spouse’s age usually matters most.
Private lenders care more about credit history than government programs. They often look for good credit and a history of responsible payments.
Lenders also review your finances to make sure you can afford property taxes, insurance, and home maintenance.
Your home will be appraised, and high-value or unique homes may take longer to evaluate.
The title must be clear, and any existing mortgage must be paid off using loan proceeds.
Counseling is required for government programs but usually optional for private loans. Even when optional, counseling is still a good idea.
Comparing Private and Government Loans
The biggest difference is the lending limit. Government programs cap how much you can borrow, while private options often allow much higher amounts.
Government loans usually have lower interest rates. Over time, even a small rate difference can add tens of thousands of dollars to your loan balance.
Government programs charge mortgage insurance, while private loans do not.
Consumer protections are stronger under government programs. Private lenders must follow general laws but have more flexibility.
Both loan types are non-recourse. You or your heirs will never owe more than the home’s value.
Smart Ways People Use These Loans
Paying off an existing mortgage is one of the most common uses. Removing monthly payments can greatly improve cash flow.
Some homeowners use the funds to delay Social Security, which can increase lifetime benefits.
Healthcare and long-term care costs are another common reason, especially when monthly care expenses are high.
Home modifications can help you stay independent longer and live safely in your home.
Some financially experienced homeowners use home equity to avoid selling investments during market downturns.
Situations Where These Loans May Not Be a Good Fit
If you plan to move within a few years, the upfront costs may not be worth it.
Using home equity to support adult children can put your own financial security at risk.
Funding risky investments with home equity increases financial danger.
Luxury spending may feel good now but permanently reduces your home equity.
Refinancing an existing reverse mortgage should only be done after careful cost comparison.
Other Options to Think About First
Downsizing can free cash without adding debt.
Traditional home equity loans or credit lines may cost less if you can handle monthly payments.
Withdrawing from retirement accounts may be a better choice for some people.
Family loans can work in certain families but must be handled carefully and legally.
Rental income from part of your property may provide cash without borrowing.
Choosing the Right Lender
Not all lenders offer private options, and terms vary widely.
Compare several lenders and focus on total costs, not just interest rates.
Check the lender’s reputation, licensing, and business history.
Understand who will service your loan over time.
Ask clear questions about early repayment rules.
Make sure all fees are clearly explained before signing anything.
Taxes and Financial Planning
The money you receive is not taxable income.
Interest deductions are limited and depend on how the money is used.
Estate planning is important so your heirs understand their options.
Medicaid and long-term care rules can be affected by timing and use of funds.
A financial advisor can help make sure this loan fits into your full retirement plan.
Making the Right Decision
This option works best if you plan to stay in your home long-term, need more money than federal programs allow, and understand the trade-off between cash today and equity later.
Be cautious if you dislike debt, expect to move soon, or have lower-cost alternatives.
Before deciding, ask yourself:
- Why do I need this money?
- Can I afford ongoing home costs?
- How do I feel about leaving less equity to heirs?
- What happens if I need care later?
- Am I making this decision freely and with full understanding?
Frequently Asked Questions
What is the main difference between private and government-backed loans?
Government loans are insured and strictly regulated, with lending limits. Private loans are funded by lenders directly, allow more flexibility, and usually cost more but can offer higher borrowing limits.
Can I switch between loan types?
Yes, you can refinance, but it will come with new costs. It only makes sense if the benefits are far greater than costs.
How do I know if the rate is fair?
Compare offers from several lenders and pay attention to the APR, not just the interest rate.
What if the lender closes?
Your loan remains under the same terms from a borrower perspective but is now serviced by another servicer.
Can I rent out my home?
No. The home must remain your primary residence.
Are these loans riskier?
They carry similar risks to government loans, but higher interest rates and fewer protections add some extra risk.
Will my heirs lose the home?
Not automatically. They can refinance, pay off the loan, sell the home, or walk away if the balance exceeds the home’s value.
Can I qualify if I am under 62?
A few lenders may take younger borrowers, at less attractive terms.
