Dennis Norman
The Federal Housing Administration (FHA) announced this week that it intends to make modifications to its Home Equity Conversion Mortgage (HECM), a reverse mortgage loan insured by the federal government, to make it more attractive and cost effective for older home owners seeking to tap their home equity.
A HECM is a reverse mortgage that is insured by the FHA. It is designed to enable elderly homeowners (62 years or older) to borrow against the equity in their home without having to make monthly payments as is required with a traditional mortgage or home equity loan. Under a reverse mortgage, the borrower receives the funds as they wish in either a lump sum payment, monthly payments over time or on a “as-needed” basis, with the interest on the loan accruing and increasing the loan amount, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. One of the great things about a reverse mortgage with regard to the borrowers heirs is, if the balance due upon settlement of the loan exceeds the value of the home, the FHA insurance covers the difference.
In a telephone call to the media and people in the mortgage industry, HUD Deputy Assistant Secretary Vicky Bott shared the Department’s plans to implement a new variant of the product, referred to as the “HECM Saver,” that will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the standard HECM option. Bott also reported there will be changes to the existing HECM loan as well (now referred to as a “HECM Standard.) The introduction of the HECM Saver and changes to the HECM Standard are expected to be effective this October.
The main difference between the two HECM options will be in the cost of the upfront Mortgage Insurance Premium (MIP) and the amount maximum loan amount available to borrowers. The upfront Mortgage Insurance Premium is charged by the Federal Housing Administration to support its insurance fund. Under the HECM Standard option, the upfront MIP will remain at 2% of the value of the property (or 2% of the maximum FHA loan limit of $625,500, if the property has a value greater than that.) HECM Saver will have an upfront MIP of only .01% of the property’s value, significantly reducing upfront costs.
This cost saving in upfront fees is able to be achieved because the amount of money available to a borrower, an amount known as the “principal limit,” under a HECM Saver will be reduced, substantially lowering the risk to the FHA insurance fund. Borrowers will receive approximately 10% to 18% less under the HECM saver option, than they would under the HECM Standard option.
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