One of the biggest concerns of senior homeowners considering a reverse mortgage is the large upfront cost to obtain one – loan origination, insurance, appraisal and loan closing can all carry significant fees. Upfront insurance premiums are of particular concern with a Home Equity Conversion Mortgage (HECM), because the FHA is responsible for paying the lender for any difference between the total loan amount and the amount for which the mortgaged property is actually sold – extra insurance covers that risk.
HECM Saver Loan
To address these cost concerns, the FHA introduced a reverse mortgage product known as the Saver, which virtually eliminates one of the larger upfront fees that borrowers are required to pay – the upfront mortgage insurance premium. The Saver reduces this fee to 0.01 percent of the the lower of the home value or the lending limit, down from 2 percent.
Ongoing FHA Insurance premiums of 1.25 percent of the outstanding loan balance are charged and added to the loan balance.
Saver loans also pay out 10 to 18 percent less than a standard reverse mortgage. For these reasons, the Saver option is best suited to those with a smaller loan need.
HECM Standard Loan
In the HECM Standard loan currently, the upfront FHA mortgage insurance premium of 2 percent remains, and ongoing premiums are 1.25 percent of the outstanding balance.
Borrowers take out the money either through a lump sum, installments or a line of credit, which allows them to withdraw money when they need it, like in a home equity credit line.
Fixed rates are only available for lump-sum products – all eligible equity is withdrawn right away, and interest begins accruing on the entire balance immediately. Thus, borrowers who do not need a large lump sum all at once should consider a reverse mortgage with an adjustable rate.
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