The New Reverse Mortgage: 4 Things You Should Know

Home equity “saver” loan sharply cuts upfront fees but also reduces loan funds to home owners.


The Federal Housing Administration has formally approved a new reverse mortgage product that sharply cuts upfront payments by home owners but also significantly reduces the percentage of a home's equity that can be paid to owners under the program. Reverse mortgages insured by the government are available on homes where the youngest owner is at least 62 years old. The program is called a Home Equity Conversion Mortgage (HECM). Here are four things you should know about the new reverse mortgage:

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Fees. The new program, called the HECM Saver loan, would largely eliminate the agency's initial insurance fee, which is now 2 percent of the amount of the loan. This could cut thousands of dollars off of product fees, which have been criticized as too expensive. However, the new product would also substantially reduce loan proceeds. The FHA said HECM Saver loans would pay out 10 to 18 percent less of a home's equity than its traditional product. That product will continue to be offered and will be called a HECM Standard loan. The new loan will be available in early October, according to the agency.

"We have noted concerns that some senior citizens find that our fees are too high," FHA Commissioner David Stevens said in a news release. "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."

Risk. The new program is designed, in part, to shield the government from losses on the HECM program. The FHA said the lower payout of the HECM Saver program would "substantially" reduce risk to its insurance fund.

Mechanics. Under the HECM program, a homeowner can access a specified percentage of his or her home's equity. The percentage varies, but the most important variable is how old the borrower is at the time of the HECM loan. Proceeds of the loan must first be used to pay off any existing mortgage on the home. The borrower then can choose to receive the remaining funds as a lump sum, through a line of credit or via monthly payments. Loan costs are effectively backed out of the remaining equity in the home and the home owner faces no further home payments save for insurance, taxes, and upkeep expenses.

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If the homeowner lives in the home for a long time and cumulative loan costs exceed the remaining equity, the FHA insurance fund pays the difference. Homeowners face no further financial obligations no matter how long they remain in the home. If positive equity remains in the home when a homeowner leaves the home, he can retain title to the property or, in the event of his death, bequeath it to heirs.

Reverse mortgages have been controversial because of their high fees and past consumer abuses. Some seniors, for example, were convinced to take out reverse mortgages and use the proceeds for unwise investments or purchases. Financial experts generally recommend that reverse mortgages be used only as a last resort by seniors who have trouble paying for basic living expenses.

Counseling. Mandatory consumer counseling is part of the government's HECM program. Because of the complexity of the loans, including the new Saver loan option, consumers should make sure they fully understand all fees and loan terms before taking out a HECM loan.

"When the prospective HECM borrower meets with a lender, a Good Faith Estimate or the Truth in Lending Act Disclosure will be provided for the purpose of making a true comparison between Saver and Standard and other costs associated with obtaining the HECM," an FHA spokesman said in a prepared statement provided to U.S. News.

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"In trying to make an informed decision, the prospective HECM borrower should consider: (1) the need for the loan and length of time they intend to remain in the home; (2) the amount of available loan proceeds, (3) the associated closing costs for obtaining the loan; and (4) whether the property's existing indebtedness can be satisfied with the loan proceeds or whether the borrower will need to draw from other financial resources."