Responding to market demand, the Federal Housing Administration (FHA) is now offering a newly modified version of the Home Equity Conversion Mortgage (HECM) product that requires lower upfront premiums.
HECM Saver will be available for all HECM loans assigned on or after October 4, 2010.
The new HECM also is an FHA insured second reverse mortgage option that not only allows older homeowners to tap into their equity to cover their expenses but also offers the option to lower upfront loan closing costs.
But differently from the HECM Standard, the amount of money available to a borrower under the HECM Saver program is reduced to approximately 10% to 18% less than HECM Standard.
The benefit is twofold, according to the FHA, because while homeowners have the option to borrow a smaller amount, HECM Saver “substantially” lowers risk to the FHA insurance fund because this principal limit is reduced.
The new option lowers costs “by almost eliminating” the upfront Mortgage Insurance Premium (MIP) required under the standard HECM option. HECM Saver will have an upfront premium of only .01% of the property's value, compared to the standard 2%.
However, the MIP for both products will be charged monthly at an annual rate of 1.25% of the outstanding loan balance.
FHA Commissioner David Stevens said HECM Saver was created in response to concerns reported by senior citizens who find the standard HECM fees “are too high.”
HECM borrowers can choose to receive funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments that are disbursed for as long as they continue to live in the home. Funds are advanced to the borrower and interest accrues, but the outstanding amount does not have to be repaid until the borrower dies, leaves the home or sells the property. At that time, if the balance due on the loan exceeds the value of the home, FHA insurance pays the difference.