NEW YORK (MainStreet) — Seniors looking to gain more cash in retirement have long turned to reverse mortgages – essentially cashing in on the value of their homes. But regulators have warned consumers to be careful of reverse mortgages – there were hidden fees and questionable payouts, critics said. Now with a new version on the market, older homeowners may have a more balanced option.
For the uninitiated, a reverse mortgage is a home loan for homeowners who are 62 years of age or older and whose homes are either paid off or just about to be paid off. The reverse mortgage allows the homeowner to get a loan through direct cash payments or via an annuity or line of credit, using the home as collateral. The amount of cash offered depends on how much equity the owner has in his or her home.
The market for reverse mortgages is in full expansion mode. Home Equity Conversion Mortgages (HECM) loans, the most common type of reverse mortgages, reached 114,000 by 2009, according to a study from ConsumersUnion.org. The group says that the future market for such mortgages could climb to a staggering $37 trillion by 2030, as the baby boomers look to cash in on the equity of their homes.
One issue holding more American seniors back from buying into reverse mortgages is the historically high upfront cost. While figures vary, upfront costs can range anywhere between $2,500 and $6,000, according to ReverseMortgageInfo.com.
In response the Federal Housing Administration (FHA) has rolled out a new reverse mortgage - called the HECM Saver - that takes direct aim at those high upfront charges.
The idea has two key planks: offer seniors the opportunity to borrow less money against their homes and then cut the upfront fees associated with reverse mortgage loans.
"Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them," says FHA Commissioner David Stevens. “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 that is required under the standard HECM option."
The HECM Saver mortgage offers a bargain basement upfront cost - 0.01% of the home’s property value. The upfront premium for the FHA’s standard reverse mortgages remains at 2%. That means the initial upfront cost of a $300,000 FHA “Saver” reverse mortgage is $30. Under the agency’s “Standard” model, that upfront premium is $6,000.
To close on the lower upfront costs, homeowners will have to agree to accept less money from their reverse mortgages. The FHA has stipulated that its HECM Saver program will offer loans at 10% to 18% lower than the FHA’s HECM Standard reverse mortgage program.
By basically eliminating the upfront costs associated with reverse mortgages, the FHA may have opened the door for millions more American seniors to borrow against the value of their homes. With retirement savings down and the economy still struggling to kick into high gear, many older homeowners clearly need the money.
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