Seniors in or near retirement should be very familiar with how each HECM program type works and most importantly which one makes the most sense for their specific situation. Here we are going to go through all the different types of HECM loans are available.
Starting with the basics.
Who can Qualify for a Reverse Mortgage?
You have to…
1. be 62 years or older (at least 60 days from birthday)
2. own the home and live in the home as your primary residence
3. have equity available (the more equity available, the more money for your retirement or to pay off mortgages or any other existing debts)
4. have never have defaulted on government debt
5. have the ability to pay for property taxes and insurance & upfront costs of the program
you are probably asking How does the reverse mortgage work?
The reverse mortgage allows seniors (62 years or older) to retire with releasing a portion of their home’s equity without having to make monthly mortgage payments or without the need to sell the home. No other program or option allows you to release equity and not have a monthly mortgage payment (not a HELOC or home equity loan since those have mortgage payment – not to mention you need income and credit scores to qualify.)
NOTE: HUD has plans to allow lenders to check both income and credit scores for the near future. This might become the norm in this industry to allow lenders to apply these financial assessments to HECM programs. If you are a senior and you are interesting in receiving a HECM loan we would recommend that you start looking into asap.
We currently have lenders nationwide who are not going to deny you for not meeting income or credit requirements.
Here are the 4 HECM Programs available. Qualifying seniors can choose whichever one suits them most.
1. HECM Standard FIxed
2. HECM Standard Adjustable
3. HECM Saver Fixed
4. HECM Saver Adjustable
There is also the ability to use a reverse mortgage purchase. This option involves buying home with a reverse mortgage. You can select from the 4 types of program above and the advantages are that you put only about 45-50% as the down payment.
Let’s consider a senior who is 62 years of age and has $300,000 in available equity.
Below we have illustrated how each particular program would work for this example.
|HECM FIXED STD||HECM FIXED SAV||HECM ARM STD||HECM ARM SAV|
|Mortgages or Liens||$0||$0||$0||$0|
|Upfront Lump Sum||$169,519||$146,689||$169,519||$146,689|
|or Line Of Credit||N/A||N/A||$169,519||$146,689|
|or Monthly Income||N/A||N/A||$890||$795|
NOTE: The older you are, the higher the percentage of quity available. Age does affect the amount of equity you can access with the HECM loan.
What are common factors in all of the options above?
§ There are adjustable rates or fixed rates- Those who need more equity can choose the Standard Program. Those who want to pay less in upfront mortgage insurance fees can choose from the Saver Programs.
§ The yearly MIP premium is 1.25%- No matter which program you select, the yearly Mortgage Insurance Premium is 1.25% on the loan amount.
§ No mortgage payments are due- Although borrowers will be responsible for the property taxes and insurance for the home, none of the program require mortgage payments.
§ Equity available is yours- Any current or future equity available is yours or to be handed down to your heirs. *You can sell the home or move with any of the optional programs.
Here is a little more information on each particular HECM loan:
HECM Fixed Standard
§ fixed interest rate
§ upfront lump sum (not taxed)
§ upfront MIP is 2%
§ pay interest on full lump sum
The HECM Fixed Saver is designed for seniors who want or need the maximum amount of equity out of their homes and are also interested in a fixed rate HECM. With this particular option, you will have to pay the full 2% upfront mortgage insurance cost. Some lenders will work with you on eliminating origination fee on the loan. Long term speaking, this is the safest option as the rates are fixed. Whilst adjustable rates are lower at the beginning, as rates go up you will never have to refinance your HECM loan.
Currently many seniors who have a first mortgage or large liens against the home are utilizing the HECM Fixed Saver to pay off their existing debts, improve their retirement cash flow by and getting rid the debt payments. While this is a costly option it works very well for many seniors, especially when taking home appreciation and offset savings from higher interest mortgage loans.
HECM Adjustable Standard
§ adjustable interest rate
§ select how receiving the income/funds (credit line, monthly income)
§ upfront mip 2%
§ pay interest on amount borrowed only
The HECM Adjustable Standard is for seniors who want the full equity out of their home. With this option you will be liable for the 2% upfront mortgage insurance which goes into the loan costs. Lenders will most likely charge an upfront origination fee of 1-2%.
The Adjustable Standard has lower interest rates due which can come in handy when you need extra income/funds in your retirement or have plans to sell the home in a few years. Seniors can also look at this option to pay off an existing mortgage as the adjustable rates are very low at the moment. This program is great for a short term plan (3-5 years). As the rates are adjustable, there is a chance that these rates increase and so could end up being a lot more expensive than initially thought.
HECM Saver Fixed
§ receive a lump sum upfront
§ never taxes
§ upfront MIP is .01% (substantial savings)
§ pay interest on full amount upfront
§ less equity available compared to HECM Standard
The HECM Saver Fixed allows seniors to pay less in upfront mortgage insurance (.01%), receive a smaller portion of the home’s equity and get into a fixed rate option. This is usually utilized by seniors who have a substantial amount of equity in the home. The money will come as a credit line or as monthly income (or combination of the two). The fees on this program are usually very low when compared to the others, we are currently able to find lenders who will not charge any origination fees (this adds to the funds you will receive). This program is one of the best options as it combines the fixed rate with a lump sum, however the fees are extremely low, thus this is a great choice for any seniors and is most beneficial as a long term strategy.
HECM Saver Adjustable
§ receive credit line or monthly income
§ not taxed ( never taxed )
§ upfront mip .01% (substantial savings )
§ pay interest on borrowed portion only
§ less equity available compared to HECM standard programs
The HECM Saver Adjustable program is a great option for those who don’t mind an adjustable rate mortgage or to receive less of the home’s equity. This particular loan is utilized by seniors with more equity in their homes and can actually be one cheapest options of all the HECM loans. This is because the interest rates for the adjustable programs are the lowest (mortgage insurance is also .01%). Most lenders charge an origination fee for this program, however the rates are low and so this can be a good short term strategy for those who have substantial equity or don’t need that much of their equity upfront.
Have there been any recent changes to any of the HECM programs?
HUD will initiate a qualification process which may include reviewing income or credit score, they had implemented this then took the requirement away last year. The HECM saver was a significant update but that is not recent – with the exit of major banks that affected seniors ability to simply walk into any bank and receive a reverse mortgage. One other thing to mention is that with higher levels of competition some lenders are now waiving fees (no fee reverse mortgage).
Am I allowed to change programs, for example, change the interest rate from fixed to adjustable without paying additional fees?
Currently there is not a program where you can later on change your mind and enter into another program. When you sign the closing documents you have 3 days to cancel the deal, but no where are you given the option to later on change the programs terms. Nor are you able to change the interest rate agreement, for example, if you choose a fixed rate then the rate is locked for life on the loan, while on an adjustable rate the interest rate can change over time based on the market changes. We would recommend that you read about the 4 program types and if you have any further questions or would like some advice then to give one of our advisers a call. That way you will be able to choose the best programs for you without any regrets down the road.
I am only looking for a short term solution with the reverse mortgage, which HECM loan type should I select?
For short term solutions your main goal should be to release some equity at the lowest cost possible (both in origination and in interest fees). We would recommend that seniors consider the HECM saver. You should also consider your other forward mortgage options such as a HELOC or home equity loan.
I plan to retire solely on my equity and my social security – which is the best program for me?
To fully answer this question, we would have to know the age of the borrower. Depending solely on your equity in retirement is not a retirement plan but more of a last case resort, if this is your scenario depending on the amount of equity available and your age (or youngest borrower) then we can discuss the best option. You can take the lifetime monthly income option if this income is sufficient then later on if more equity is needed you can tap into the funds (credit line, lump sum). There are too many factors to determine this without one on one discussion.
Is there a clear winner in 2012 as the best program seniors should be seeking?
Right now we believe that the Fixed Saver program is quite attractive for many reasons. First of all, since you are able to lock in a fixed rate (and rates are low) you pay close to nothing in mortgage insurance premium, also you will receive the funds upfront (but you are utilizing less of your equity than a standard program). Those who have short term goals can consider the HECM saver adjustable which currently has fantastic rates and the credit line option can be selected.
Also there are deals on the HECM Saver Fixed. This is a great choice for some seniors especially since there are barely any origination fees as most lenders are waiving the origination fee.
I need a fixed rate but I am not sure if i should take a Standard or a Saver, how do I decide?
Many seniors will be forced into a Standard as their existing mortgage debts will only be able to be paid off by utilizing this program. The more equity you have, the more options you have, and the Saver is always a great option to pay less in upfront fees.
I am comfortable with a lower adjustable rate HECM, should I choose the Standard or the Saver?
This same scenario as above. If your first mortgage is not substantial and you have the equity then you can then select a Saver since you will pay less in upfront mortgage insurance fees, however if you need the most amount equity go for the adjustable standard.
Passing or leaving equity for my heirs/estate is a main concern how can I make sure they will receive my home once I pass?
This question is best answered on an individual basis since there are so many factors involved as to how much equity will be left for your heirs. Making payments can essentially pay down the interest,
another thing to keep in mind is that your home will appreciate at a normal rate – sometimes greater than the actual mortgage interest therefore offsetting the cost and protecting the equity in the home.
How will you ever decide which option is right for me?
We can assist and advise you in finding the best HECM option for you. Not only that, but we will also make sure to find the right lender nationwide. Ultimately it is your retirement, your equity, thus your decision.Double Click to edit this text