Reverse Mortgages for Seniors: HECM Saver vs. HECM Standard

Introduction

A reverse mortgage is like a regular mortgage in terms of it is a loan secured by real estate as collateral. However, unlike other types of mortgage loans, borrowers do not put interest during the life of the loan. This only means that it cannot be due while the borrower is still living in the home. Reverse mortgages are "non-recourse" loans, meaning that if the borrower defaults, the lender has no claim to any of the borrower's assets other than the house which serves as the collateral.

Main Item

The federal government, through the Federal Housing Administration, offers a program called the Home Equity Conversion Mortgage. This mortgage, known as HECM, is currently the most often-seen reverse mortgage in the United States today. Under HECM, the FHA insures the loan, guaranteeing lenders that it will pay any difference between the loan amount and the value of the home when the loan is due. FHA charges the borrower a Mortgage Insurance premium to cover the cost of this insurance. Almost all reverse mortgages are insured by the FHA.

HECM Standard:

The standard HECM program is offered for homeowners over the age of 62. Its eligibility requirements are:

• The borrower must own and live in the property as the primary residence
• The borrower must get consumer counseling from an FHA-approved counselor so that they are educated on HECM.

With an HECM loan, the older the borrower is, the larger the possible loan amount. In case of co-signers, the age is calculated from the age of the youngest borrower. Since the program is designed with retirees in mind, there are no income or credit requirements. The loan amount is based on a combination of factors including borrower's age, credit, current interest rates, and a current appraisal of the property. There are no restrictions on how money from a reverse mortgage may be spent. The borrower is still responsible for property taxes, insurance, maintenance, and other property related bills.

The main drawback of HECM Standard is that it can feature somewhat high closing costs. There is an up-front mortgage insurance premium of 2 percent of the value of the home. In addition, there is an ongoing 1.25 percent premium, which may be paid at the end of the loan term.

HECM Saver:

Because of the high up-front costs of the standard HECM loan, the FHA has released the "HECM Saver" program. This is actually best for borrowers who would like to take smaller amounts compared to what would be available with the standard HECM.

Under HECM Saver, the up-front mortgage insurance premium is reduced to 0.01 percent of the home value, from the 2 percent charge found in HECM Standard. The downside is that the loan amounts available are lower. Typically, HECM Saver payments are 10 to 18 percent less than under the standard program. The ongoing 1.25 percent premium remains in effect under HECM Saver. Because of its lower up-front costs and smaller loan amounts, the HECM Saver program is most suitable for those needing a smaller loan.

The eligibility requirements for HECM Saver are the same as the standard: borrower must live in the property as the primary residence, and must get counseling from an FHA approved source. As in the standard HECM, there are no restrictions on how the money may be spent. To apply to either program, an application must be made through an FHA-approved lender.