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The Federal Housing Administration (FHA) announced in late September that it was making changes to its reverse mortgage program, which allows older home owners to gain more spending power from tapping into their home equity.
The FHA’s federally insured Home Equity Conversion Mortgage (HECM) enables owners of a principal residence who are at least 62 years old to withdraw some of the equity from their home to cover living expenses and health care costs while continuing to live in their home without having to make traditional mortgage or home equity loan payments.
Among the changes to the program, the FHA has lowered the limit for the amount of cash that can be withdrawn from a property, based on the age of the borrower and the expected interest rate of the loan.
It also has lowered the effective interest rate floor from 5.5% to 5.0%, which will enable many reverse mortgage borrowers to receive more money than previously. However, this benefit could be short lived if interest rates turn higher.
The FHA also introduced HECM Saver, which is aimed at home owners who want to lower their upfront closing costs and are willing to borrow a smaller loan amount than they can receive with a standard HECM loan — about 10% to 18% less. This option is available for all HECM case numbers assigned on or after Oct. 4.
"Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them," said FHA Commissioner David Stevens. "In response, we created HECM Saver, which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option."
The HECM Saver has an upfront premium of only .01% of the property's value, compared to 2% for a standard HECM loan. Borrowers of both the Saver and standard HECM are also charged a monthly insurance premium of 1.25% of the outstanding loan balance.
Even with its reduction in upfront costs, the Saver poses a substantially lower risk to the FHA insurance fund because of the lower principal amounts available to the borrower.
HECM borrowers can 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, the FHA insurance pays the difference.
The FHA’s HECM program appears to be gaining in popularity with elderly home owners in an economy where access to credit and capital remains tight.
For more information, e-mail Steve Linville at NAHB, or call him at 800-368-5242 x8597.
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