'Saver' reverse mortgage aims to cut start-up costs
By Kathleen Lynn,
Reverse mortgages allow seniors to use their home equity while staying in their homes - but have been criticized for their high upfront fees, among other things. A new loan has hit the market, however, offering sharply lower start-up costs in exchange for a tighter limit on the amount that can be borrowed.
"It opens up new options for people to think about in terms of how they tap their equity as a retirement resource," said Barbara Stucki, vice president of home equity initiatives at the National Council on Aging.
Even with these lower costs, advisers say older homeowners should be cautious about reverse mortgages because the loans can use up the value of their homes, and because, in some cases, salespeople have persuaded them to put the loan proceeds into unsuitable investments.
The new loan, called the Home Equity Conversion Mortgage Saver, charges an upfront insurance premium of 0.01 percent of the value of the home - a fraction of the 2 percent charged for the traditional Home Equity Conversion Mortgage. Both HECMs are insured by the Federal Housing Administration, which backs most reverse mortgages.
On a $400,000 home, a borrower who chooses the Saver would pay $40 in upfront insurance premiums, compared with $8,000 on a regular reverse mortgage.
The tradeoff is that less money is available to the homeowner - 10 percent to 18 percent less, depending on the age of the borrower.
At recent interest rates, a 72-year-old owner of a $400,000 home could borrow as much as $192,875 under the HECM Saver, compared with $246,398 under the traditional HECM, said Peter Bell, president of the National Reverse Mortgage Lenders Association, a trade group representing about 400 lenders. The lower borrowing limit means the FHA is less likely to lose money on the loan, making the smaller insurance premium possible.
At the same time, many of the private lenders that make these loans have sliced their origination fees, Bell said. While in the past, they charged origination fees totaling thousands of dollars - on top of the insurance premiums - many lenders have now cut or waived the origination fees. They have been able to do that because investors are paying a premium for securities backed by reverse mortgages, Bell said.
Because lenders' origination fees vary, it pays to shop around for the best deal, Stucki said. "A few percentage points in the cost of the loan or service fee could make a big difference," Stucki said.
While the start-up costs on reverse mortgages have dropped, the annual insurance premium has risen, from 0.5 percent of the outstanding loan balance to 1.25 percent. That has been necessary to protect the FHA from losses during the housing market's meltdown.
Reverse mortgages used to have only adjustable interest rates, but the FHA recently added a fixed-rate option. While many borrowers like the idea of knowing the interest rate won't rise, experts caution homeowners to think twice. To get the fixed rate, the homeowner must take out the full loan amount as a lump sum, and will be paying interest and insurance on all of it, even if only a small amount is needed.
"Most people would be better served with the adjustable rate, because they don't have to take all the money upfront," said Susanna Montezemolo, a vice president with the Center for Responsible Lending. She also pointed out that elderly homeowners who suddenly have a large pool of money can be targeted by salespeople selling potentially unsuitable financial products, such as deferred annuities.
Montezemolo said that homeowners should not take reverse mortgages lightly.
"They're an option for someone who is cash-poor but equity-rich and can't meet living expenses," she said. "For people who want to tap into their equity to have a vacation or something, it becomes a very expensive vacation if you start adding up all the fees."
Younger borrowers - in their mid-60s - have increasingly applied for reverse mortgages because they've lost their jobs in the recession. But Stucki said these borrowers may risk depleting their home equity. In addition, she pointed out, homeowners who delay using a reverse mortgage will get more money, because older homeowners can borrow larger amounts.
After rising steadily for years, the number of reverse mortgages dropped sharply last year. Declining home values led the FHA to lower the amount that could be borrowed, and many homeowners couldn't get enough through a reverse mortgage to retire their old mortgages, Bell said.
Before signing up for a reverse mortgage, homeowners should consider whether it's even a good idea to stay in the home, both Montezemolo and Stucki said.
"People with health conditions need to be very thoughtful about whether this makes sense for them," Stucki said. "Staying in a house that's too big, too old or unsafe just doesn't make any sense."