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Reverse mortgages can be a useful tool for older citizens who need to complement their income and whose only financial asset is their home. The Federal Housing Administration, FHA, provides the only government insured reverse mortgage product, the Home Equity Conversion Mortgage. This loan allows homeowners over 62 to get a loan secured by the equity on their home. With a HECM seniors do not have to pay anything unless they sell the house or die. In which case the survivors can sell the property to pay the mortgage or pay the mortgage balance and keep the house.
The biggest problem for seniors is the high cost of reverse mortgages. AARP– a nonprofit organizations that helps people 50 and over improve the quality of their lives– has repeatedly recommended seniors to exhaust all other avenues before buying a reverse mortgage. The reason is home equity loans, second mortgages and even home equity lines of credit all provide cheaper alternatives to a HECM. This has discouraged many seniors from choosing this otherwise interesting option.
However, the FHA has recently introduced measures to lower the cost of their HECM reverse mortgage. Although the FHA do not directly provide reverse mortgages, they insure them and are a government reverse mortgage regulatory agency, so they have a major say in the final cost of a reverse moretgage.
The FHA is now offering a new HECM product with lower startup and maintenance costs. It is called HECM Saver. The previous product has been renamed HECM Standard. The big difference between these two HECM products is the size of the loan and the upfront Mortgage Insurance Premium, MIP.
The new HECM Saver has a Mortgage Insurance Premium of only 0.01 percent of the property’s value. This will obviously reduce the cost of a HECM substantially, as the MIP is the biggest cost of a reverse mortgage. The only catch, an there is always a catch, is that seniors who buy a HECM Saver will receive 10 to 18 percent less with a HECM Saver mortgage than with a HECM Standard option. This way the FHA have managed to reduce the risk of insuring reverse mortgages and can afford to reduce the cost of insuring them.
These changes come as part of a FHA effort to implement a new protocol for the processing of HECMs. The new protocol requires clients to use a new financial interview tool to help seniors decide if a HECM reverse mortgage is the right choice for them.
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