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!

Jul. 8, 2008 - RE: Understanding HECM