A new mortgage product is making “reverse” mortgages more affordable. Reverse mortgages typically have high fees, but the new Home Equity Conversion Mortgage (HECM) Saver allows borrowers to get a reverse mortgage with lower upfront costs as long as they are willing to borrow a smaller amount.
A reverse mortgage allows homeowners who are at least 62 years old to borrow money on their houses. The homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the home, the age of the borrower, and current interest rates. The loans do not have to be repaid until the last surviving borrower dies, sells the home, or permanently moves out. The most widely available reverse mortgage product is the HECM, the only reverse mortgage program insured by the Federal Housing Administration (FHA).
To cover any potential losses on a reverse mortgage, the FHA typically keeps as much as 2 percent of the value of the property upfront as a mortgage insurance premium. The new HECM Saver cuts the upfront insurance premium to .01 percent. For example, a borrower with a $400,000 home would pay $40 in upfront insurance premiums, as opposed to $8,000 on a standard reverse mortgage. The catch is that borrowers will receive approximately 10 to 18 percent less under the HECM Saver option than they would receive under HECM Standard. For example, a 70-year-old homeowner in Massachusetts with a house valued at $400,000 would be able to get a lump sum of $205,077 under a HECM Saver loan as opposed to $243,117 under a HECM Standard loan, according to the AARP’s reverse mortgage calculator. For this reason, the HECM Saver may be more suitable for borrowers with short-term needs.
Other upfront fees remain the same under the HECM Saver, including the loan origination fee and closing fees. In addition, there is an annual insurance premium, which will be charged monthly at an annual rate of 1.25 percent of the outstanding loan balance for both the HECM Saver and the HECM Standard.
Reverse mortgages are not for everyone. In addition to the high fees, the loans may affect eligibility for government benefits like Medicaid and they are not ideal for parents whose major objective is to safeguard an inheritance for their children.
For an article on the HECM Saver from The Washington Post, click here.