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One of the main complaints against reverse mortgages or Home Equity Conversion Mortgages (HECM) is how incredibly expensive they are when compared to conventional mortgages and home equity loans. The idea of being able to stay in your home during retirement and still enjoy the benefits of selling your home is appealing, but if you are paying through the nose for the privilege the appeal can lose some of its sparkle.
HUD’s Federal Housing Administration (FHA) has finally realized this and began to offer in October 2010 a new HECM model for senior homeowners. If you are considering buying into a reverse mortgage or HECM, you need to decide what HECM model is best for you: the standard HECM or the HECM Saver.
The main benefit of a HECM Saver over a standard HECM is cost. The new HECM charges an initial mortgage insurance premium of only 0.01 percent. Eligibility requirements are the same as the standard model and it can be used for the same transaction types and payment plans. The only inconvenient is the maximum loan available for a HECM Saver is much lower than with a regular reverse mortgage.
A standard HECM has much higher initial costs but you can borrow more. For instance, if your home is worth $150,000 and you are 75 years old, you could borrow up to $89,640 at a 6 percent interest. However, the costs are so high you do well to consider all your other options before choosing a reverse mortgage. Having said that a HECM reverse mortgage, issued by the federal government, usually provides much better terms than a commercial reverse mortgage.
The main cost of HECM is the initial mortgage insurance premium, which amounts to 2 percent of the maximum claim amount. The maximum claim amount is the lesser amount of your house’s sales price, appraised value or FHA mortgage limit. However, a HECM Saver has an initial mortgage insurance premium of only 0.01 percent. That is 200 times less than the initial mortgage insurance premium of the regular reverse mortgage.
To illustrate, if your house is appraised at $200,000, you may have to pay $4,000 for the initial mortgage insurance premium. However, the premium of a HECM Saver would only be $40. A significant saving by any standard.
The new HECM SAVER provides homeowners with another option to cash out on their home’s equity without having to sell their house or move. If your retirement savings are inadequate or you have a medical emergency, a reverse mortgage may be your only hope and a HECM Saver may be your cheapest option.
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