by Thomas Gerrity, Publisher
In late 2010 the Federal Housing Administration (FHA) announced a modified version of its Home Equity Conversion Mortgage (HECM)--better known as a reverse mortgage. The change is aimed at addressing the major complaint seniors citizens have when considering reverse mortgages--the up-front cost.
All reverse mortgages are insured by the federal government. They allow older homeowners--age 62 or older--to tap into the equity in their homes to cover living expenses, health care costs or any purpose, while continuing to live in their homes without having to make the payments that are required with a traditional mortgage or equity loan. The loan is repaid with interest when the homeowner dies, sells the house or moves out for 12 months or more. The homeowner is obligated to continue paying property taxes and homeowner’s insurance.
The new option is known as the Reverse Mortgage Saver, while the traditional reverse mortgage is now called a Reverse Mortgage Standard. Borrowers using the Saver option will receive about 10% to 20% less in proceeds than with the Standard--but at a significantly cheaper cost.
Lower fees
With all federally insured reverse mortgages, you pay an up-front mortgage insurance premium to cover any losses from the mortgage. The premium is not based on the loan amount, rather it's based on the home's appraised value or the government's lending limit of $625,500--whichever is lower.
For the Saver, the initial insurance premium is 0.01% of the home’s appraised value, while it remains 2% for the Standard. That’s a big difference. For example, for a mortgage backed by a home valued at $300,000, the up-front premium on a Saver would be $30, while the Standard premium would be $6,000.
Smaller loans
The amount of available proceeds for which you can qualify with a reverse mortgage depends on your age, appraised home value and current interest rates. The older you are, and the more valuable your home (and the less you owe on your home), the more funds you qualify for.
A senior homeowner will qualify for a smaller loan with the Saver option than with the Standard Reverse Mortgage. The lower up-front insurance premium comes with a reduction in the amount of money that can be borrowed. By reducing the amount that can be bowered, the FHA believes there will be less chance for losses to the program. which occur when the amount borrowed exceeds the value of the home.
According to AARP's reverse-mortgage calculator, a 72-year-old living in Fairfield with a home worth $300,000 could get a lump sum of about $151,000 from a fixed-rate Saver or a lump sum of about $191,000 from a fixed-rate Standard.
Fixed rate vs. adjustable rate
A borrower can choose an adjustable rate for either type of mortgage. The initial proceeds are lower with an adjustable-rate mortgage. The same 72-year-old borrower would receive an initial amount of about $161,000 with the adjustable-rate Saver and about $116,000 with the adjustable-rate Standard.
With a fixed rate, you must take the full lump sum that you're eligible to receive. But for some seniors, the full draw of a fixed-rate reverse mortgage could be more money than they need, and interest on the full amount begins to accrue from the day that the mortgage is signed. Adjustable-rate reverse mortgages give you more control over the amount borrowed. These loans give you the option of taking the money as a line of credit, which you can tap as you need, or receive in monthly payouts. This can reduce the interest charges significantly.
Other fees
In addition to the initial insurance premium, other up-front costs include a loan origination fee of 2% on the first $200,000 of the apprised value of the home and 1% on the balance, with a cap of $6,000.
A Mortgage Insurance Premium (MIP) guarantees that if the company that manages your account goes out of business, the federal government will step in to ensure that borrowers still have access to their loan funds. MIP also guarantees that the borrower never will owe more than the home is worth. The premium is 2% of the maximum amount of the loan or the home value, whichever is less, plus an annual premium of 0.05% of the loan balance.
Service Fee Set-Aside. The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing the loan.
Federal regulations allow the loan servicer to charge a monthly fee between $30-$35. The amount of money set aside is determined largely by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars. Note: The servicing set-aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee of $30-$35.
Appraisal Fee: $300-$400
Closing Costs: Same as with a regular home mortgage, including attorney fees.
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