A PERL of Wisdom
A Private Equity Release Loan or PERL is a reverse mortgage that does not require mortgage insurance. PERLs have recently begun to appear on the market and have diverged into a string of varieties, all with a common purpose: to improve on the shortcomings of the HECM and to bring reverse mortgages into the mainstream. They have names like HomeSafe©, Equity Elite©, Platinum© and Equity Power© and all distinguish themselves from a HECM by not requiring mortgage insurance and being far lower in cost as well as having unique features that distinguish each individual PERL from all others. With the introduction of the PERL the concept of non-recourse home equity lending has now matured into a sophisticated asset management tool.
Although PERLs were originally aimed toward borrowers with higher-value homes who wanted to access more equity than HECM lending limits would permit, many borrowers who would qualify for a HECM are now choosing a PERL in order to take advantage of benefits not available with a HECM. Let’s examine some of these points in more detail:
Non-Recourse - Both a HECM and a PERL are non-recourse loans. So, borrowers are never required to make a monthly payment or repay the loan during their lifetimes and their heirs will never owe more than the value of the home securing the loan, even if there are other properties or estate assets available.
Minimum Age - 62 for HECM and only 60 for PERL.
Equity Requirement – Equity requirements are lower for HECM. So, in general, you need more equity to qualify for a PERL.
Loan Amount – HECM maximum loan amount is $574,200 (interest rate 3.0%, youngest borrower age 92 and home value above $765,600). PERL maximum loan amounts go to 4 million dollars.
Draw Period – Money can be drawn from a HECM line of credit for the lifetime of the borrowers as long as there is available credit. A PERL line of credit has a 10-year draw period, after which no additional funds may be withdrawn.
Condo Approval – If your home is a condo, the association must be approved by HUD in order to permit HECM financing. No HUD approval is required for a PERL if the value of the unit is above $500,000 in which case Fannie Mae approval is acceptable or the unit can be approved individually by the lender without the need to apply to HUD or Fannie Mae.
Pay off Debts to Qualify – A common problem with a HECM is the need to pay off debts in order to qualify. HECM guidelines contain a Catch-22 that requires borrowers who won’t qualify for a HECM because of too much debt to use their own assets to payoff the debts before the loan will be allowed to close. Most borrowers in this position do not have the cash to pay off their debts and since they are not allowed to use the HECM loan proceeds for that purpose, their loans are denied. A PERL suffers from no such inconsistency. If there are enough loan proceeds from the PERL to pay off the borrower’s debts and doing so will allow them to qualify for the loan, then use of loan proceeds for that purpose is permitted.
Mortgage Insurance – FHA charges an up-front Mortgage Insurance Premium of 2% of the lesser of the appraised value of the property or the Lending Limit. That’s a one-time charge of up to $15,312 for higher-value homes. There is also an ongoing annual charge of 0.5% against the outstanding balance that is added to the interest rate on the loan. No mortgage insurance is required on a PERL, which substantially reduces both the up-front and ongoing cost.
Reverse Second Mortgage – Lastly, there is at least one PERL available that will permit an existing conventional mortgage to be left in place. This is perfect for borrowers who have a low interest 1st mortgage that they don’t want to pay off. It functions in the same way as a Home Equity Line of Credit, as a 2nd mortgage, except that no monthly payments are required on any balance owed.