A Less Costly Reverse Mortgage
The New York Times
By LYNNLEY BROWNING
Published: December 9, 2010
OLDER homeowners who have spent years building up equity may be tempted to cash out through a reverse mortgage. But high fees can make these loans pricey.
A new government program reduces some of the expenses. In October, the Federal Housing Administration, the unit of the Department of Housing and Urban Development that runs the reverse mortgage program known as Home Equity Conversion Mortgage, or HECM, introduced the Home Equity Conversion Mortgage Saver, or HECM Saver.
HECM (pronounced HECK-um) Saver trims the upfront insurance premium due at closing to 0.01 percent of a property’s value, from 2 percent. But the amount that can be borrowed is also reduced, by 10 to 18 percent, compared with the standard HECM loan program.
Still, Stanley Gil, a reverse mortgage consultant in Garden City, N.Y., said, “I think we’re going to see a lot of people using it.” The loan “is really going to help people who need some extra cash and have built up equity in their home,” he added.
And AARP says the Saver loan would work well for those homeowners who did not need to borrow the maximum allowed — which is $625,500, based on a property’s value and the interest rate of the reverse mortgage, among other things. HUD provides calculators to help determine how much can be borrowed, and AARP offers advice on its Web site.
Reverse mortgages essentially release the equity in a property as cash that can be used for expenses like health care or home renovations, while at the same time paying off whatever remains on the mortgage.
The loans leave homeowners with no monthly mortgage payments; they become due, with interest and other fees, when the owners die, move, or sell the property — or if they fail to maintain the property or keep up with property taxes and insurance.
The leveraged property must remain a primary residence, though, and only single-family homes qualify — as well as buildings with one to four units, provided at least one of the units is occupied by the borrower. Among the other restrictions is age. Anyone who is an owner, and is listed on the title to the property, must be at least 62.
Reverse mortgages boomed in recent years but then acquired a bad reputation, in part because of their costs. Origination fees for the loans are now capped at $6,000, while other closing costs are about equal to those for a conventional mortgage. Until HECM Saver, the upfront insurance premium was a major additional cost that could run as high as $12,510.
Fixed-rate reverse mortgages typically run 0.25 to 1.25 points above conventional mortgages; they now generally range from 4.99 percent to 5.25 percent, depending on the loan size, compared with an average 4.91 percent for a 30-year fixed-rate conventional mortgage.
The tax-free payout in a reverse mortgage, which can also carry an adjustable rate, can be taken in a lump sum or parceled out monthly, providing a steady income stream. The loans don’t require a minimum credit score or have income limits. But borrowers cannot be underwater, or owe more on a current mortgage than the property is worth.
The F.H.A.-backed version of the reverse mortgage — the most popular — is still unavailable to co-op owners. Lemar C. Wooley, an agency spokesman, said the F.H.A. was “currently evaluating the HECM program for co-ops to determine if it would meet our financial requirements.”
Consumers Union, the independent nonprofit testing organization that publishes Consumer Reports, says cash-needy homeowners should consider a home-equity loan before a reverse mortgage, because of the high closing costs and insurance fees.
Reverse mortgages may not be suitable for homeowners who want to leave their property to heirs, mortgage experts say; often the loan must be paid off through the sale of a home, although the note may be refinanced.
