The U.S. Department of Housing and Urban Development has announced a new reverse mortgage alternative aimed at cash-strapped seniors who are looking to reduce the upfront costs of tapping their home equity in exchange for lower loan proceeds.
The move comes on the heels of increases in the cost of mortgage insurance. Mortgage insurance is required on all reverse mortgages so that the lender is protected if the senior outlives the value of the home. It also it also protects the owner in the event the lender went out of business.
Both issues come into play in a down real estate market where many home are worth less than they were at the time the reverse mortgage was issued.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. Funds obtained from the reverse mortgage are tax-free.
The new HECM Saver is a variation of the federally insured Home Equity Conversion Mortgage (HECM Standard), which allows owners over 62 to stay in their homes for as long as they wish. More than 130,000 HECMs were originated last year.
According to Vicky Bott, HUD deputy assistant secretary, implementation of the HECM Saver will reduce the amount of mortgage insurance premium (MIP) required at closing. However, the reduced up-front cost also reduces the maximum amount an owner can take out.
The HECM Saver will have an up-front MIP of 0.01 percent of the maximum claim amount (the value of the home or $625,500, whichever is less). The HECM Standard up-front MIP remains at 2 percent of the maximum claim amount.
In addition, both products will have an annual MIP of 1.25 percent. This is an increase in the now HECM Standard MIP, which has been 0.5 percent annually.
The HECM Saver has principal limits between 10 to 18 percent less than the HECM Standard principal limits, thus offering consumers the option of lower proceeds in exchange for lower costs. According to HUD, the lesser decrease in principal limits will be for younger borrowers and the larger for older borrowers.
The changes were made because the funds for reverse mortgages have dwindled. The HECM portion of the overall FHA Mortgage Insurance fund pool of funds is down significantly and no private lender has resurfaced. Private reverse mortgage "jumbo" funds have virtually evaporated given the present credit crisis.
According to Peter Bell, president of the National Reverse Mortgage Lenders Association, reverse mortgages are increasingly being used by seniors to pay off defaulted mortgages and avoid foreclosure, thus preserving their ability to remain in their homes.
A reverse mortgage can also be an effective tool to relieve the burden of current loan payments or moving from the home. In many cases, homeowners use reverse mortgages to pay off existing "forward" mortgages, thus eliminating burdensome payments on their current mortgages and freeing up cash for living and health-care expenses.
While reverse mortgages has been used primarily as way to keep seniors in their homes, they have other uses as well. The Housing and Economic Recovery Act of 2008 approved the "HECM for Purchase" program. The move allows older homeowners to make a large downpayment on a new home and then utilize the reverse mortgage as permanent financing.
The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower. These fees are in addition to the mortgage insurance premium.
If you are a senior in the market for a reverse mortgage, shop around for the best program for you. Some lenders have reduced fees for servicing, origination and title insurance for fixed-rate HECMs. Lump-sum payouts, monthly draws, lines of credit — or combinations of these options — are now part of the reverse mortgage mainstream.