Is HECM Lite for You?

by Gina Pogol
July 20th, 2010

One of the biggest drawbacks for FHA reverse mortgages, or HECMs, is the high upfront cost for the mortgage insurance. It’s higher than a regular FHA loan because the fee is calculated from the property value, not the amount borrowed. So a 2.00% upfront mortgage insurance premium based on a $400,000 property may be 4% of the loan proceeds if you can only borrow $200,000. That’s $8,000 right off the top.

But wait, there’s more. HUD has implemented recent changes that have dropped the amount that can be borrowed by 10%, meaning that if you could get $200,000 before, you can only get $180,000 now. Which increases that $8,000 to 4.4 percent of the proceeds. And what if you just want a line of credit for emergencies, or $1,000 a month added to your income? If you only spend $20,000 of your available credit before you move or die, the insurance comes to a whopping 40% of your loan proceeds! And there is also an annual premium equal to .5% of your balance. For smaller amounts, the HECM as it works today is impracticable.

So, here’s where HECM lite comes in. The product is being developed by HUD right now. At the National Reverse Mortgage Lenders Association’s Washington Policy conference in early July, Colin Cushman, Director of Portfolio Analysis at HUD, explained the new reverse mortgage product, which will hopefully be available by October 1, 2010.

HECM Lite is he reverse mortgage version of a home equity line of credit (HELOC).Tailored to  borrowers who are looking for less money, the HECM Lite requires no upfront MIP, and its a 1.25 percent annual MIP is based on the money used, not the home’s value. The amount that can be borrowed is less than that of a traditional HECM. So your line of credit would cost you no insurance until you use it, or if you took $20,000, your premium would be $2,500

The HECM program is currently facing a shortfall and HUD is looking for ways to erase it. During the presentation, Cushman stated HUD understands that additional cuts to principal limits in 2011 would kill the program’s affordability for seniors, and HECM Lite is one way of keeping that from happening.

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