August 27, 2012

Low-Cost Option for Reverse Mortgages


Many older homeowners would like to tap their home equity through a reverse mortgage but have been put off by the relatively high costs up front. Now, there’s a new option that slashes those costs to a tiny fraction of previous charges.
The Home Equity Conversion Mortgage (HECM) Saver option is a relatively new program offered through the Federal Housing Administration (FHA). Like a standard HECM/reverse mortgage, it allows homeowners age 62 and above to borrow against their home equity without having to make monthly loan payments.
 
The big difference is, the upfront mortgage insurance premium on the saver is only 0.01 percent of the home’s appraised value – compared to 2 percent on a standard reverse mortgage. On a home valued at $250,000, that works out to an upfront fee of only $25, versus $5,000 on the standard HECM.*
 
The other major difference is that borrowers using the HECM Saver option cannot borrow as much as they could with the HECM Standard. The maximum you can take out of your home with the saver reverse mortgage is typically at least 10 percent less than you can get with the standard loan.
 
On both loan types, borrowers must pay an annual fee of 1.25 percent of the amount borrowed, along with typical closing costs such as the appraisal, title search and the like. These can be rolled into the loan if one chooses.
 
In either case, the loan does not have to be repaid until the borrower (and/or spouse, when applicable) is no longer living in the home, which is the major attraction of a reverse mortgage. In most cases, the home is eventually sold after it is vacated, with the proceeds used to repay the loan at that time. Anything left over goes to the borrower or his/her estate.
 
Reverse mortgages can be taken out in several ways – borrowers may opt to take a single lump sum, a series of regular payments as long as they own the home or a line of credit to be tapped as needed, among others. Each has advantages and disadvantages, which should be discussed with a financial advisor before taking out a reverse mortgage.
 
*Borrowers also pay an origination fee of 2 percent on the first $200,000 of the appraised value, and 1 percent beyond that, to a maximum of $6,000.

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