FHA reverse mortgage loans: New option for senior home owners

by Karen Lawson
October 3rd, 2010

As part of an overhaul of its mortgage loan programs, the FHA is offering a new model for reverse mortgage loans, FHA guidelines have been criticized for requiring high up-front costs, but a new reverse mortgage loan option allows homeowners to borrow less money against their homes while lowering out of pocket cash paid at closing.

The original HECM mortgage loan product remains available; home owners can choose between FHA HECM loans according to their needs.

  • Major reverse mortgage lenders are also lowering or waiving origination and servicing fees to attract more interest in reverse mortgage loans. Differences between traditional HECM loans and HECM saver loans include:
  • Lower loan limits: HECM saver loans allow homeowners to borrow less against their homes in exchange for lower costs and fees.
  • Mortgage payout options: Borrowers selecting a lump sum payout may request a fixed rate mortgage (FRM), but borrowers taking out a credit line (they can withdraw HECM funds as needed) can only qualify for adjustable rate mortgages (ARM) loans. Borrowers who don’t need all of their HECM loan funds at once can save by taking out a HECM credit line; they can save by accruing interest on amounts withdrawn as opposed to having interest accrue on a lump sum payout. Mortgage rates for HECM ARM loans are currently near 3 percent.

FHA loans: Learn about HECM loans before requesting mortgage quotes

FHA guidelines require HECM borrowers to attend educational seminars for learning how HECM loans work, and for acquainting prospective borrowers with potential impacts of a HECM loan on their finances and heirs. Considerations include:

  • Potential impact of changing home values on remaining home equity, your assets, and estate.
  • Potential for opportunistic offers of financial services and products that may diminish the proceeds of your HECM mortgage. FHA guidelines prevent mortgage companies and brokers from promoting financial products and services to HECM borrowers, but mortgage loans are a matter of public record, and borrowers may be solicited by other entities. Avoid scams; don’t respond to unsolicited offers of financial services and products.
  • Low mortgage rates are making mortgage loans more affordable. You may qualify for a traditional mortgage loan that meets your needs without having to use a HECM loan.

Researching mortgage loans, community home owner programs, and consulting with your financial adviser and/or estate planner can help with determining mortgage loan options best suited to your needs and circumstances.

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