Several big changes are coming to the Federal Housing Administration’s reverse mortgage program.
Starting on Monday, the program will introduce a reverse mortgage product that will virtually eliminate one of the biggest upfront fees that borrowers are required to pay. A mouthful, the product is known as the Home Equity Conversion Mortgage Saver, or the HECM (pronounced HECK-um) Saver. At the same time, the F.H.A.’s program will also make changes to its standard reverse mortgage, which will significantly increase certain costs, though it may make more money available for some borrowers.
I outlined the changes in detail — and there are many details — in an article I wrote for Saturday’s paper. But because of space constraints, I had to cut out an example that compared the two reverse mortgage products — the HECM Saver, and the standard version — side by side.
So here it is:
If a 65-year-old borrower with a home valued at $400,000 were to apply for a standard reverse mortgage with a fixed rate of 5.06 percent, he would be eligible for about $255,000. But he would also owe an upfront mortgage premium of $8,000, and roughly $3,600 in other closing costs, which means he would ultimately receive a lump sum of about $243,000, according to ReverseVision, a reverse mortgage software company.
This assumes that the lender waived the origination fee and a servicing fee (lenders can charge an origination fee of 2 percent of the first $200,000 of your home’s value, plus an additional 1 percent for amounts over that, though the total is limited to $6,000). The continuing mortgage premium and interest would be tacked onto the loan balance each month.
If the same homeowner applied for a Saver reverse mortgage, he would be eligible to receive $212,800. But after deducting a $40 upfront mortgage premium, and $3,600 in closing costs, he would get about $209,000. This calculation also excludes any servicing or origination fees, but it’s unclear if lenders will waive them as they have with the standard reverse mortgages.
The above situations assume that borrowers take the money in a lump sum. But they can also choose to receive it in installments or a line of credit, which allows you to withdraw the money when you need it, like a home equity credit line. Right now, a reverse mortgage with an adjustable rate would be about 2.66 percent, according to ReverseVision, though the rate could rise or drop in the future.
Fixed-interest rates are only available on lump sum products, which means borrowers must withdraw all the equity they are eligible for right away and interest begins immediately accruing on the entire balance. For that reason, it may make sense for borrowers who have smaller needs to get a reverse mortgage with an adjustable rate.
“If they don’t need all of the money, they should seriously consider the line of credit,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, adding that the Saver reverse mortgage may become a more direct competitor of the home equity line of credit.
So readers, what do you think? Do you think the new Saver reverse mortgage makes the product more attractive?