Reverse Mortgages Lower Upfront Costs

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Thanks to Uncle Sam, seniors' reverse mortgages are getting a facelift.

Reverse mortgages grew in popularity earlier this year, as American seniors turned to them to access more cash for retirement. But growth is slowing and the federal government is out to trigger more demand. To make things easier, the Federal Housing Administration is out with a new program that lowers upfront costs on reverse mortgage products.

That could help boost the number of reverse mortgages, which suffered a monthly reverse last July despite a year-long rise in activity. The FHA reports that the number of reverse mortgage applications slid in July by 1.4% (at 8,961 properties). The FHA says that it’s the first decline in reverse mortgage applications after five months of growth. Even so, reverse mortgage activity is down 40% on a year-to-year basis through the first half of 2010.

The tack the FHA is taking to rejuvenate interest in reverse mortgages is through lower initial payments — a big problem for senior homeowners who may want a reverse mortgage, but don’t have the upfront cash to get the process rolling.

According to the FHA, the new program, called HECM Saver — named after its Home Equity Conversion Mortgage reverse mortgage product - is scheduled for October 2010. The new version will feature a low cost reverse mortgage product insured by the FHA, and one with a much lower upfront insurance premium than the current version HECM offering.

The FHA describes HECM as a basic reverse mortgage loan that is backed by the federal government and designed to give senior homeowners access to cash that can cover the gaps in their personal living expenses. The money borrowed isn’t due until borrower either sells the home, passes away, or otherwise permanently departs the home. The HECM does have an insurance twist — if the money due upon settlement of the loan exceeds the value of the home, the FHA insurance will make up the difference.

The HECM Saver offers an additional wrinkle. Currently, the standard HECM requires a 2% upfront Mortgage Insurance Premium that reverse mortgage customers must pay out of pocket. The new HECM Saver lowers that premium to 0.01%, giving senior homeowners with lower incomes an easier gateway into the reverse mortgage market. The FHA will reduce its risk liability on the loans by cutting the total amount of cash a reverse mortgage customer can borrow via HECM Saver by anywhere from 10% to 18%.

Further details on the lower-cost HECM will be available by Sept. 14, when the FHA plans to issue more specific guidelines. The FHA says the new HECM Saver will have a 1.25% annual insurance payment based on the total amount of the cash borrowed by a reverse mortgage customer.

By offering more consumers a lower-cost path into the reverse mortgage market, the FHA hopes to pick up demand. As usual, consumers will have the last word.

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