HECM Saver: A reverse mortgage with lower costs
A common complaint about reverse mortgages has been that they come with high upfront fees. The HECM Saver is a reverse mortgage product that was introduced by The Federal Housing Administration (FHA) in late 2010 that addresses this problem. The HECM (Home Equity Conversion Mortgage) Saver program differs from the traditional HECM Standard Program that enables eligible borrowers 62 years and older to tap into the equity in their homes to cover ongoing living expenses without having to make a monthly mortgage payment.
HECM Saver and HECM Standard Differences
- The key difference is cost. The HECM Saver has lower upfront premium costs than the HECM Standard, making it more affordable. An HECM Saver requires an upfront, initial mortgage insurance premium (MIP) of only .01% of the maximum claim amount (the less of the following: the sales prices, the appraised value, or the FHA’s maximum mortgage limit of $625,000). The HECM Standard has an upfront mortgage insurance premium of 2.0 percent of the maximum claim amount. For comparison, see the chart below. In one example, assume that a home has an appraised value of $300,000. The HECM Saver’s .01% upfront MIP would be $300, as opposed to the upfront MIP cost of $6,000 in an HECM Standard reverse mortgage. Quite a significant difference! (Remember that the upfront MIP is not the only cost in either an HECM Saver or HECM Standard; both will likely have loan origination fees and third party fees necessary to close the loan, though these costs are likely to be the same in both programs.)
|Maximum Claim||HECM Saver||HECM Standard|
|Upfront MIP .01%||Upfront MIP 2.0%|
|Annual MIP 1.25%||Annual MIP 1.25%|
- The HECM Saver allows the borrower to borrow less money than in an HECM Standard. According to the FHA, “borrowers will receive approximately 10 to 18 percent less under the HECM Saver option, than they would receive under HECM Standard.” The reason that the loan limits are less on the HECM Saver than on the HECM Standard is to decrease the risk to the FHA insurance fund. The lower loan limits offset the lower costs.
HECM Saver and HECM Standard Similarities
- Both programs have the same qualification requirements. Neither program requires a credit nor income check.
- Both reverse mortgage programs allow a borrower to receive funds as either a lump sum at the time of loan origination, to establish a line of credit, or to request to receive a fixed monthly payment for as long as the borrower lives in the home as the borrower’s primary residence. Once a credit line is granted, it is guaranteed and cannot be frozen, unlike a Home Equity Line of Credit (HELOC).
- In both programs, interest starts accruing when funds are given to the borrower, but the outstanding amount need not be repaid until the borrower leaves the home, sells the home, establishes another primary residence, or dies. When any of these events occur, the loan must be repaid. However, if the balance due on the loan is greater than the value of the home, the FHA insurance pays the difference.
- Both the HECM Standard and the HECM Saver are reverse mortgages that are insured by the federal government.
- Both programs charge a monthly MIP, separate from the upfront MIP, that is based on an annual cost of 1.25% of the outstanding loan balance. (The MIP rate for the HECM Standard had been .5%, but the FHA raised it to the same level as in the HECM Saver, 1.25% annually.)
- Both programs require the borrower to stay current on property taxes and homeowner’s insurance payments. Failure to do so can result in the loan balance coming due.
The amount that a borrower can receive on either an HECM Saver or HECM Standard reverse mortgage varies, depending on the individual loan. The FHA recommends that interested borrowers contact a HUD-approved HECM counselor or FHA-approved lender, so the borrower can discuss his or her individual financial situation and to determine how much can be borrowed.
Think about the size loan you need. If a smaller loan amount works for you, the lower costs of the HECM Saver make great sense. For instance, the HECM Saver is ideal for borrowers who are looking to do a home improvement project or who know that they will not be staying in the home for a long time.
It makes good sense to look at all of your loan options, before choosing a reverse mortgage. Think about why you need the money, how much you need, whether you can afford to maintain the payments you currently make, and how long you plan to stay in your home. Depending on your answers to these questions, an HECM Saver, an HECM Standard, or a different kind of loan, like an HELOC or standard refinance may best serve your needs.