HECM- Reverse Mortgage Overview
The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for an estimated 90 percent of the total market. Available since 1989, HECM loans are insured by the federal government through the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD).
A reverse mortgage is a unique loan that enables senior homeowners, age 62+, to convert a portion of their home equity into tax-free income without being forced to sell the home, give up title, or make a monthly mortgage payment. Funds available from the reverse mortgage can be used in any way the homeowner chooses. Once the reverse mortgage is received, borrowers are not required to make another mortgage payment ever. Homeowners are only responsible for making yearly tax and insurance payments on the property.
Reverse mortgages continue to be one of the few areas in the mortgage industry that continues to show growth in these uncertain economic times. The National Reverse Mortgage Lenders Association (NRMLA) reports the current loan volume continues to increase each year. As of September 2008, 112,154 reverse mortgage loans were closed across the country, which is more than double what the industry produced in 2005 at only 43,131 loans closed.
The amount of money a homeowner may have available depends on several factors including, the appraised value of the home, the age of the homeowner, and the current interest rate. The home’s location can play a factor too. Until recently, the limit at which FHA was willing to insure a loan varied by county and was adjusted annually based on the median home value. However, as part of the Homeownership Act of 2008, a higher national lending limit of $417,000 was approved by Congress and President Bush. The new higher limit will enable more homeowners to obtain greater benefits, as many homes were valued higher than the previous county lending limits.
Borrowers are required to pay closing costs, as with any other loan. As part of the closing costs, the homeowner must pay a mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (the lesser of the home value or county lending limit) up-front, plus an annual premium thereafter equal to 0.5 percent of the loan amount. The insurance premium is what guarantees that if the loan servicer goes out of business, the government will step in and make sure the homeowner has continued access to his or her loan funds. Furthermore, the MIP guarantees that the borrower will never owe more than the value of the home.
An origination fee is also charged by the lender as well as any traditional loan closing costs, such as title insurance, attorney’s fees, recording fees, etc. As part of the Homeownership Act of 2008, the origination fee has been lowered and capped at $6000.
Sun Valley Financial is a reverse mortgage broker with over 15 years of mortgage experience. Sun Valley Financial currently does business in Arizona, Utah, Idaho, New Mexico and California. Every employee of Sun Valley Financial has made a commitment toward helping homeowners reach their financial goals.
