As of October 4, 2010 there is new option in the area of Reverse Mortgages. Federally insured Reverse Mortgages have been offered under the name of HECM loans, for “Home Equity Conversion Mortgage.” The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) have introduced a new program called HECM Saver. Designed as a closing-cost saver, HECM Saver is an option to the existing HECM program called HECM Standard.
HECM Saver trades off some of the borrowing power in exchange for lower upfront closing costs. Specifically, HECM saver saves on one particular closing cost, the initial mortgage insurance premium (MIP). MIP represents the amount paid by the borrower to insure against the possibility that the value of the property will not be sufficient to cover the amount of the debt. Once a remote possibility, the “upside down” home loan has become a frequent occurrence, even on the supposedly sheltered Reverse Mortgages.
HECM Standard will continue to charge MIP at the rate of two percent (2%) of the maximum claim amount. On a loan with the maximum of $300,000.00, this would translate to a fee of $6,000.00. With the HECM Saver, the MIP charge is one one-hundredth of a percent (0.01%). On a $300,000.00 loan, the MIP charge would be $30.00. As is true of all Reverse Mortgage costs, the MIP fee is collected up front. Sometimes the homeowner may elect to pay closing costs up front. More commonly, the homeowner elects to use the borrowing power of the Reverse Mortgage to wrap the closing costs in with the other borrowed funds.
The savings is achieved by reducing the maximum loan-to-value ratio. According to HUD No. 10-205, the amount the borrower can finance will be reduced approximately ten to eighteen percent (10-18%). The plan is to reduce risk to the FHA insurance fund by reducing the principal limit or amount of money available to a borrower. Therefore, for seniors who have been deterred by high closing costs, the HECM Saver program should allow at least one of the closing costs to be substantially eliminated.
Obviously the HECM Saver results in a much lower MIP cost to the borrower. However, the other fees and closing costs are unaffected by the HECM Saver. Therefore, if the lender is charging points, or loan origination fees, the overall borrowing cost can still be substantial. Costs such as appraisals, title insurance, document preparation, surveys, etc., will also be unaffected.
HECM Saver is available for new Reverse Mortgages, or any pending loan which was originally HECM Standard. HECM Saver can be used with adjustable or fixed interest rate plans. HECM Saver can also be used with all five payment plans: tenure, term, line of credit, modified tenure and modified term.
For Elder lawyers, it is better to have more options for clients who are considering a Reverse Mortgage. Substantial savings will be achieved on overall closing costs due to the change in the prepaid MIP. Obviously the client’s overall financial situation will still need to be examined in light of the program choice now available. Our advocacy for our clients can help guide them to appropriate choices.