Seniors looking to obtain a reverse mortgage have a few different products available to help them withdraw equity from their home.
The Federal Housing Administration (FHA) offers the Home Equity Conversion Mortgage (HECM) Standard and the HECM Saver.
Both products require borrowers to be at least 62 years old to qualify and provide consumers access to their home equity in the form of a lump sum, term or tenure payments, a line of credit, or a combination of the options.
While they’re very similar, there are some important differences potential borrowers need to consider.
The HECM was released in 1989 and comprises most reverse mortgages, according to data from HUD, the Department of Housing and Urban Development.
The product sets itself apart by allowing borrowers to withdraw a significant amount of equity from their homes. To access such a large amount of equity, borrowers are required to pay higher insurance premiums to the government, which insures the loan.
To obtain a HECM Standard, borrowers must pay an initial 2% insurance premium of the maximum claim amount and an annual insurance premium of .50%.
The HECM Saver was released in 2010 by the FHA to provide seniors a low-cost way of accessing the equity in their home.
While the product is still relatively new, the number of consumers choosing the HECM Saver is increasing.
Borrowers who take out a HECM Saver are required to pay an upfront mortgage insurance premium of .01% of the maximum claim amount and an annual insurance premium of 1.25%. As a result of paying less in fees, borrowers also receive less money than they would from the HECM Standard.
Earlier this year, the HECM Saver received praise from the financial planning community as a great tool to help seniors be more prepared for retirement.
“[Taking out a reverse mortgage] is going to result in a better scenario,” said John Salter, Texas Tech professor and wealth manager for Evensky & Katz Wealth Management when discussing older Americans’ retirement. “This shouldn’t be a surprise to anybody. If you can tap into the value of a home, you’re going to be better off.”
HECM Standard vs. HECM Standard
Both reverse mortgage products provide seniors a safe and secure way of accessing their home equity, but one might make more sense than the other.
The table below compares the products, fees and proceeds and how they differ. The information is based on a 72-year-old borrower who has no mortgage balance on a home valued at $300,000.
|Product||Rate||Initial Insurance Fee||Net Principal Limit|
|HECM Fixed Standard||4.00%||$6,000||$195,817|
|HECM Fixed Saver||4.50%||$30||$150,300|
|HEMC Standard Adjustable||2.74%||$6,000||$192,817|
|HECM Saver Adjustable||2.99%||$30||$159,587|
Principle Limited Calculated using ARLO™ calculator
While the HECM Saver might have a higher rate, the amount of fees is significantly lower than for the HECM Standard. Since borrowers are paying less in fees, the product also provides less in proceeds than the regular HECM.
But if you’re using a reverse mortgage to eliminate monthly payments, a HECM Standard might be a great choice.
Fixed Rate Options
The Adjustable Rate Standard Program will also still be available for borrowers who need the full draw, as well as the Saver Program for the adjustable rate loans. Borrowers who are purchasing using a reverse mortgage can still do so with the Adjustable Rate program and the full draw on the Standard Program but those who want only a fixed rate after March 29th will have to bring in the extra cash to close and use the Fixed Rate Saver Program. This may affect how much house some borrowers can afford if their down payment funds are limited so the adjustable rate loan may be their best option.
At any rate, the Fixed Rate program is a relatively new loan as it was not even available for more than just the last few years. Borrowers have been closing adjustable rate reverse mortgage loans for over 25 years. Those borrowers who really want the Fixed Rate Standard Program need to know the deadline as there is no way to know if HUD will ever bring the program back or not (and what the rates would be at that time if they did). But those who are not able to close on this program should know that borrowers have been successfully closing on the adjustable rate product for some time now and while the fixed rate may have been their first choice, they do have other viable options.