Get to Know HECM Programs
HECM, the abbreviation of Home Equity Conversion Mortgage, is a kind of reverse mortgage that is insured by FHA (the Federal Housing Administration). That’s why it is also called FHA reverse mortgage. So you now know that an FHA reverse mortgage is not a reverse mortgage issued by FHA, but a reverse mortgage insured by FHA. Under FHA’s protection, lenders will be paid the difference between the house price and the reverse mortgage in the following situation:
• The borrower defaults on his/her reverse mortgage
• The borrower lives longer than the expected life span so that his/her home equity has been exhausted and the sales price of the house are insufficient to pay off the reverse mortgage.
• The house price declines when the reverse mortgage becomes payable, thus the money the borrower owes exceeds the sales price of the house.
HECMs vs. privately sponsored reverse mortgages
Apparently, privately sponsored reverse mortgages are not protected by FHA. So once situations I listed above occur, the lender will not get compensated. In order to obtain protection from FHA, you should fork over extremely high costs and fees. So it is understandable for private reverse mortgage lenders to charge you a relatively low fee. However, the interest rate of HECMs is much lower than privately sponsored reverse mortgages.
Besides, you can borrow more money by taking out privately sponsored reverse mortgages than by HECMs.
Requirements for HECMs
It allows seniors older than 62 to use a portion of their home equity for various purposes. They can choose the payment options: withdraw all the cash all at once, receive hundred bucks every month, set up line of credit on their home equity or combine any two payment options.
You should own your property outright and you have paid off the existing mortgage or paid back a considerable amount. When you fall in the second scenario, you should pay off the remaining loan balance with your reverse mortgage immediately after you apply for it successfully.
Before taking out a reverse mortgage, you should enter into the reverse mortgage counseling. By doing so, you will have a clear idea what you are involved in.
Apart from requirements for borrowers, the properties have to meet some standards. The eligible house types are family homes (single-type and multi-type), condominiums, townhouses and mobile houses.
Am I entitled to cancel it?
Yes, you have the right to cancel your HECM within 3 days after closing it, unless you use the proceeds of your reverse mortgage to buy a new house.
HECM Standard and HECM Saver
There are two programs for HECMs – HECM Standard and HECM Saver. HECM Standard is the oldest form of HECM program, while HECM Saver is the new one which takes effect on October 4, 2010. Both programs have fixed-rate option and variable-rate option. The differences between HECM Standard and HECM Saver lie in:
• Interest rate – the interest rate of HECM Standard is higher than HECM Saver.
• Mortgage insurance – the mortgage insurance of HECM Standard is 2% of the house value or the loan limit ($625,000). As for HECM Saver, the mortgage insurance is 0.01% of the house value or the loan limit.
• Loan amount – you can borrow more money with HECM Standard program than with HECM Saver program.
Here is an example for further explanation:
The location of your house: California
Your age: 62
The age of your spouse: 62
House value: $300,000
Existing mortgages: $0
• When you choose HECM Standard:
If you choose HECM Standard program, you can borrow $185,700 maximum. This loan amount is 61.9% of the house value. With the same house value, the older you are, the more you can borrow. That’s another story and I am not going to digress from my focus.
So, the mortgage insurance is 2% of the house value, that is, $6,000 ($300,000 * 2%). Plus other fees, the total costs will be $11,483 for HECM Standard variable-rate option and $8,483 for HECM Standard fixed-rate option, since the origination fee of $3,000 can be waived for fixed-rate HECM Standard.
• When you choose HECM Saver:
Suppose you opt for HECM Saver, the maximum amount you can borrow will be $156,900 for variable-rate option and $136,800 for fixed-rate option. The loan amount is 52.3% and 45.6% of the house value, respectively, which are 10%+ less than HECM Standard.
Unlike HECM Standard, you will be charged only $30 as mortgage insurance ($300,000 * 0.01%). Consequently, the total costs will be $7,513 for variable-rate option and $5,513 for fixed-rate option, when other fees are added. You should know that the origination fee can’t be waived for HECM Saver fixed-rate option.
8 Responses to “Get to Know HECM Programs”
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October 18th, 2012 at 2:22 am
Few months ago, I calculated the overall costs with a reverse mortgage calculator. What confuses me are two terms – HECM Standard and HECM Saver. After reading your article, I know the exact difference between them. It is very helpful for those who decide to select from these two financial products.
October 19th, 2012 at 2:23 am
“So you now know that an FHA reverse mortgage is not a reverse mortgage issued by FHA, but a reverse mortgage insured by FHA. ”
Then, who issues HECM?
October 19th, 2012 at 2:27 am
@Sonja A. Langham
All mortgage loans insured by FHA are issued by FHA-approved lenders, which vary from state to state. These lenders offer loan funds to qualified borrowers. If a borrow default, FHA will be responsible for the lender’s loss.
On http://www.fhaloanpros.com/lenders/fha/, you can find all FHA-approved lenders in your select state.
October 19th, 2012 at 2:35 am
“you have the right to cancel your HECM within 3 days after closing it”
This is known as “a three day right of rescission.” Upon your loan closing, your lender may explain how to cancel HECM. If not, be sure to ask your lender for instructions on this process, which could help you avoid future hassles.
October 19th, 2012 at 2:42 am
Besides the age requirements, your home property must meet certain requirements as well. It must be a single family home, or a 2-4 unit property with one unit occupied by you.
HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
November 13th, 2012 at 11:13 am
Since HECM is just insured by FHA, who is HUD’s loan servicing contractor?
November 13th, 2012 at 11:16 am
Concerning requirements for HECMs, there are also financial requirements applied. For example, income, assets, monthly living expenses and credit history may be verified. You may also need to verify timely payment of real estate taxes, hazard and flood insurance premiums.
November 14th, 2012 at 9:40 am
@Marigold
The loan servicing contractor HUD employs for the majority of its HECM related functions changes periodically. Contact information for the current contractor is available at HUD’s Secretary-Held Assets Servicing Contractor website:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/fmaddr