Sep. 14, 2007 - Understanding HECM
 I
mentioned on an
earlier post that HECM loans were rising. Not the rate,
but the popularity or sheer quantity of loans being
funded. That prompted a reader to call me to help
explain what a HECM was. So what is a HECM loan?
The Home Equity Conversion Mortgage (HECM) is the
oldest reverse mortgage product. It is the "original"
from way back in 1989. Ahh, it seems like just yesterday.
HECM is insured by the Feds!
A HECM loan is going to be insured by the Fed's through
the FHA, they are a subsection of HUD or Housing and
Urban Development. To make it easy, we can just call
them all the FEDs. The Feds don't loan the money
directly but they are going to guarantee this
loan. For many people this insurance is a very important
feature. They want the security of having the government
guarantee on the loan.
How much can you borrow?
The amount of money a borrower is eligible to
receive depends on a couple of factors. Your age,
the value of your home, interest rates and where in the state
you live.
Location is important. The county that you live in
determines the limit to which HECM values your home. Each
county has a limit to which the FHA will insure loans.
Sometimes that limit is well above the value, and then sometimes it
is not.
Currently (for 2007), the FHA loan limit varies from $200,160
(for rural areas) to $362,790 (for high-cost areas).
This changes annually and there is a chance that it will be
increased significantly in the near future. Here in Contra
Costa and Alameda County that limit is that $362,790
limit.
Generally speaking, the older you are and the
more valuable the home, the more money you
may receive.
What if my home is above the HECM Limit?
Simple, if your home is above the limit, the
amount available to you is just calculated as if the
value was at the area limit. For a home in my
area, if it was really valued at $650,000 a HECM loan would assume
it was valued at a mere $362,790. The amount you would have
available would be determined by that $362,790 ceiling as opposed
to the actual value.
That Fed insurance comes at a Price!
From the National Reverse Mortgage Lenders
Association Website;
"As part of the closing costs, the homeowner must
pay a mortgage insurance premium (MIP) equal to 2 percent of
the maximum claim amount (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
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."
Let's decipher that. Let's use a $300,000 loan
amount. The up front mortgage insurance premium that the
borrower would have to pay is going to be $6,000.
Additionally, there is an annual fee for that insurance of
$1,500. This could be built into the proceeds of the loan and
doesn't have to be paid out of pocket by the borrower.
That Mortgage Insurance Premium combined with the limit set
forth by the FHA will sometimes negate the advantages of a HECM
reverse mortgage. Then again, in some situations a HECM
can provide a significantly higher loan amount than other
options.
The good news? There are plenty of other
programs available!
The other good news? Since it is almost
impossible for a consumer to determine which particular program is
best for them all by themselves, it is vitally crucial to use a
Reverse Mortgage Professional. I know that doesn't sound like
good news but by using a professional they can easily run the
numbers and determine the pros and cons for each separate
program. Use a Pro and get the good news!
Next I'll explain Fannie Mae's version "The Home Keeper" and
then we'll get into my favorite, the Jumbo Reverse Mortgage!
Contact Mike anytime, (925) 288-9977 Ext 104
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