A new product is making “reverse mortgages” more affordable. Reverse mortgages typically have high fees, but the new “Saver” reverse mortgage allows borrowers to dramatically lower their upfront costs – as long as they’re willing to borrow a smaller amount.
A reverse mortgage allows homeowners who are at least 62 years old to transform the equity in their home into liquid cash without having to move or make regular loan repayments. The homeowner receives a sum of money from the lender, usually a bank, based on the value of the home, the age of the borrower, and current interest rates. The loan doesn’t have to be repaid until the last surviving borrower dies, sells the home, or permanently moves out.
The most widely available reverse mortgage product is the “Home Equity Conversion Mortgage,” or HECM, which is the only type of reverse mortgage insured by the Federal Housing Administration. To cover potential losses on these mortgages, the FHA typically requires that as much as 2 percent of the value of the property be paid upfront as a mortgage insurance premium. But the new HECM “Saver” mortgage cuts this upfront insurance premium to just .01 percent. That means a borrower with a $400,000 home would pay just $40 in upfront insurance premiums – as opposed to $8,000 with a standard reverse mortgage.
The catch is that borrowers will receive approximately 10 to 18 percent less under the “Saver” option than they would with a standard reverse mortgage. For example, a 70-year-old homeowner in Massachusetts with a house valued at $400,000 could get a lump sum of $205,077 with a “Saver” loan, as opposed to $243,117 with a standard loan, according to AARP’s reverse mortgage calculator. For this reason, “Saver” loans might be more suitable for borrowers with short-term needs.
Other upfront fees remain the same under the “Saver,” including loan origination fees, closing fees, and an annual insurance premium, which is charged monthly at an annual rate of 1.25 percent of the outstanding loan balance. Reverse mortgages are not for everyone. In addition to the high fees, they can affect eligibility for government benefits such as Medicaid, and they’re not ideal for parents whose major objective is to safeguard an inheritance for their children.
