AS OF OCTOBER 1, 2013 THE HECM STANDARD AND HECM SAVER PRODUCTS ARE NO LONGER AVAILABLE.
Deciding between the different options of the reverse mortgage can be challenging and certainly depends on your situation. The Home Equity Conversion Mortgage, or HECM, is the most common reverse mortgage and only one available in Minnesota. Before looking at the difference between the HECM Standard and HECM Saver, let’s look at the similarities.
A mortgage just like any other mortgage, the reverse mortgage offers special terms for seniors home owners 62 and older. Advantages for seniors are with the reverse mortgage there are no income or credit score requirements to qualify and no monthly payment requirements. Borrowers are responsible for paying property taxes and insurance.
The Principal Limit or maximum loan amount is determined by the home value or FHA Lending Limit, the age of the youngest borrower (the older one is the more they can receive), the Expected Interest Rate, and the program chosen.
The funds available can be received in a lump sum, monthly payments, or a line of credit. The monthly payments can be structured as one needs or for life as long as the home is the primary residence. Funds in the line of credit grow so more funds can be available in the future.
The borrowers keep the title to the home and are responsible for property taxes, insurance, and maintaining the home. Unlike a conventional loan the interest accrues, increasing the balance with no mortgage payments due until the home is no longer the primary residence of the borrower(s). The repayment amount is the lesser of the loan balance or fair market value of the home. As a non-recourse loan there is no personal liability to the borrowers or their estate for repayment,. If there is remaining equity, it goes to the borrowers or their heirs.
One can have a trust, life estate, or receive Medicaid (Medical Assistance in Minnesota), Elderly Waiver or other public benefits.* In the case of a couple even if one of the borrowers goes into the nursing home or passes away, the other one can stay in the home and the loan isn’t due until both borrowers are no longer in the home as their primary residence. Not considered income, Social Security and Medicare are not affected.
*Check with legal advisor for your situation.
With no limitations on how the funds can be used, through the years hundreds of thousands of seniors have benefitted from the reverse mortgage allowing them to stay in their home and have security, independence and control.
Because the closing costs are up-front, they are often perceived as high and often scare people away. However, as with a conventional loan, there are traditional closing costs including an origination fee, appraisal, title fees, title insurance and recording fees. As a FHA insured loan, with the HECM borrowers also pay the FHA Mortgage Insurance Premium (MIP).
The HECM Standard is the original HECM reverse mortgage, first insured by FHA in 1988. In 2010 the Saver was introduced. The Saver has a reduced up-front FHA MIP of 0.01% compared to 2.00% for the Standard. But it also reduces the Principal Limit available to borrowers. While the Saver may be appealing because of the lower up-front MIP, in the long run it may not be the best option.
Initially Karen liked the idea about the reduced closing costs of the HECM Saver. As we compared the HECM Standard and HECM Saver she has a different perspective.
With the HECM Standard Adjustable Rate she would receive over $13,000 more than the HECM Saver Adjustable Rate and $12,000 over the Saver Fixed Rate based on her home value of $170,000. The Fixed Rate requires that all funds be drawn as a lump sum at closing vs having the flexibility of monthly payments, line of credit, lump sum or a combination of these with the Adjustable Rate.
Because she didn’t have any mortgages to pay off or other needs for all funds initially, pulling all the funds out in a lump sum with the HECM Standard Fixed Rate or Saver Fixed Rate (the only fixed rate option available as of April 1, 2013) is not the best option for her situation. So it came down to deciding which of the two Adjustable Rates would best fit her situation.
Being Karen plans on staying in her home for many years to come, when looking at the estimated Amortization Schedules, the HECM Standard Adjustable Rate option is more advantageous for her. With the higher funds available initially with the HECM Standard, she could leave funds in the line of credit to use as she needs. The line of credit grows so more funds become available over time meaning she can access more over time.
Or with the tenure monthly payment option she would be able to receive more in her monthly payments as long as she remains in the home as her primary residence.
If the interest rate is higher on the HECM Saver, the increased costs of the MIP up-ftont MIP for the HECM Standard is diminished over time when compared to the HECM Saver by the lower interest rate it has versus the HECM Saver. But even if the interest rate is the same on the two adjustable rate programs, less funds are available up front which would mean if in the future she needed more funds she would need to refinance, paying closings costs a 2nd time. Being she plans to stay in the home for many years to come, the HECM Standard providing more available funds initially will best suit her situation.
The HECM Saver could be beneficial to those who don’t want to pay as much in the up-front closing costs but also don’t want to use as much equity from their home. It can be ideal if one plans on moving in a shorter period of time or has a higher home value and wants to preserve more of the equity.
Mark and Margaret are considering moving to a one-floor home in two to three years but needs some extra cash flow now. The HECM Saver with the lower up-front MIP is more advantageous for their situation. This would preserve some of their equity for when they sell. And at that time
they could use the HECM for Purchase program to purchase their new home without having monthly mortgage payments.
Before assuming the lower up-front MIP of the HECM Saver is the best option, consider your long-term goals and needs, look at the calculations and Amortization Schedules to determine which is going to the most advantageous for your situation. While we can’t predict the future, reviewing the options can help you make better plans for your future.
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*As of April 27, 2015 income and credit are used for the Financial Assessment to determine borrower’s ability and willingness to pay property taxes and insurance into the future
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