Standard vs. Saver Reverse Mortgages: What’s Right for Me?
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Retirement can be a rich and exciting time in your life — a chance to explore sidelined interests, invest more deeply in your hobbies and travel. It’s also a good time to evaluate your finances and determine how and where you want to live during your retirement years.
If you have significant equity in your home, you may opt for a Home Equity Conversion Mortgage (HECM), more commonly known as a reverse mortgage.
This loan allows you to borrow against your home without having to make monthly payments (as long as you live there). This money can be used as a buffer against financial emergencies, to fund home renovation projects or supplement your other income. A purchase reverse mortgage can also be used to buy a house if you’re thinking about downsizing or relocating for your retirement years.
In the past, the Federal Housing Administration (FHA), under the U.S. Department of Housing and Urban Development (HUD), insured two reverse mortgage products: the HECM Standard and the HECM Saver. The latter product allowed homeowners to borrow smaller amounts than they would with the standard reverse mortgage and to pay less mortgage insurance, too.
But the HECM Saver was phased out in 2013, and the FHA streamlined the two products into one that combined features of both. You’ll likely come across articles that reference the HECM Saver, but know that these are no longer available. The HECM is the only government-backed reverse mortgage product now, though there are private products, too.
What is a reverse mortgage?
Reverse mortgages are home equity products for homeowners age 62 and older. As noted above, a reverse mortgage allows you to borrow against the equity in your home. The key difference between a reverse mortgage and other home equity products is that you do not have to make monthly payments as long as you reside in the house. You will still have to pay property taxes, and you’ll need to maintain the house.
When you choose to move, or when the house passes to your children or other inheritors, you or they will need to repay the mortgage. However, the amount owed on a reverse mortgage can never exceed the value of the property. This is known as a non-recourse loan.
Age and the amount of equity you have in the house will determine how large a loan you’ll receive. Older borrowers are typically approved for higher loan amounts, although co-applying with a younger spouse may negatively impact your approval amounts.
Once approved, you have several options for accessing the funds from a reverse mortgage. Depending on your goals and circumstances, you can take a lump sum payment or leave it open as a line of credit. If you’re supplementing your income, you might choose to receive monthly installments.
Michael Banner, president of the Florida-based Professional Mortgage Alliance, strongly advises against taking the entire amount out in a lump sum unless it’s absolutely necessary — even if it bucks the advice of family and friends or the loan officer. He said people often feel an impulse to have the full sum of cash in their bank accounts, but because the interest will begin to accumulate on the full amount right away, they will owe significantly more than if they opted for a line of credit or monthly installments.
He gave an example of a borrower who has a $200,000 reverse mortgage and chooses to take a lump sum at the urging of her relatives. “Maybe all Grandma needed was $1,500 a month for the next five or 10 years,” Banner said. “Wouldn’t you rather Grandma was paying 4.5 percent on $1,500 today, $3,000 next month, $4,500 the next month, rather than starting out with $200,000?”
Reverse mortgage products
The FHA-backed HECM is the most common type of reverse mortgage, though it’s not the only option. For homeowners with equity above $679,650, a proprietary reverse mortgage may be the better choice. Also known as jumbo reverse mortgages, these products are offered exclusively through private lenders, as the FHA will not back reverse mortgages that exceed $679,650.
American Advisors Group and Finance of America Reverse offer these loans directly and also back jumbo reverse mortgages given by other lenders. As with an HECM, you can use the proceeds of a jumbo reverse mortgage loan for any expenses you choose.
If you need money for one specific use, such as home renovations, you might apply for a single-purpose reverse mortgage. You’ll have less flexibility with how you use the money, however, as all the funds must be applied to the stated purpose.
You can also use a reverse mortgage to buy a new home under the HECM for Purchase program. In this case, the amount you can borrow depends on age, too. As borrowers get older, they’re able to borrow larger amounts.
Banner offered a theoretical example of a retiree who sells a home in New Jersey for $300,000 and wants to buy her dream home overlooking a golf course in Florida. The new house is listed at $500,000. The retiree doesn’t want to take on monthly mortgage payments and is reluctant to take out $200,000 from her portfolio to cover the difference between her sale profits and the new home.
Rather than settle for a less expensive house, she can take out a reverse mortgage to cover the remaining 40 percent of the house. She will not receive a lump sum or monthly installments as in a typical reverse mortgage, but she can instead use the funds to close on the house. The retiree will not have to make payments on the house unless and until she moves out.
Banner said the HECM for Purchase can also help retirees keep a portion of their money liquid even when buying a new house. The same retiree who bought her $500,000 dream home might opt instead to downsize into a less expensive home — say, one for $300,000. Rather than use all the cash she gained in the sale of her previous property, however, she might put $180,000 of that toward the house and take a reverse mortgage for the other $120,000. She still avoids monthly payments, but she also has $120,000 in cash available for emergencies, lifestyle expenses or investing.
How to get a reverse mortgage with the FHA
To apply for an FHA-backed HECM, you’ll need to find a lender who uses the program. Not all lenders participate in the HECM program, so shop around until you find one who does.
Vet lenders’ reverse mortgage experience, too. “This is a highly specialized product, so you want to go to a reverse mortgage professional,” Banner said.
Just because a company offers reverse mortgages doesn’t mean the loan officer handling your account has a background in these products. Ask how many reverse mortgages they’ve handled and whether they’re affiliated with reverse mortgage associations. Banner recommends looking up the lender or loan officer’s LinkedIn profile and web presence to see whether there are positive affiliations or reviews related to reverse mortgages.
Once you’ve found a lender with whom you’d like to work, you’ll need to meet a series of requirements related to your financial circumstances and the property. In addition to being 62 or older, you’ll have to prove that you own your home outright or you’ve paid down a significant portion of your mortgage, the house is your primary residence and you’re able to stay current with property taxes, maintenance expenses and miscellaneous costs, such as homeowners association fees. The lender will also verify that you’ve paid your taxes and insurance premiums on time and the property is eligible for the FHA HECM. You can read the full list of requirements on the HUD website.
The history of the “Saver” reverse mortgage
The FHA introduced the HECM Saver Program in 2010 to provide more affordable options for borrowers who found the closing costs and mortgage insurance rates on the HECM Standard prohibitive. The mortgage insurance premium offered on the HECM Saver was the key differentiator at just 0.01 percent of the loan amount. The premium on the HECM Standard was 2 percent.
Functionally, however, the loans were very similar. Borrowers did not have to make payments on the HECM Saver until they stopped residing in the home, and they would never owe more than the value of the house. HECM Saver borrowers could also choose whether they wanted their loan proceeds as a lump sum, in monthly installments or as a line of credit.
In September 2013, HUD eliminated the HECM Saver and Standard options and began offering a single product.
The bottom line
If you have equity in your house, a reverse mortgage can bolster your retirement income and help you achieve your financial goals. But it’s important to consider whether your circumstances warrant a conventional HECM or a private reverse mortgage product. Your best move is to discuss your options with a trusted, experienced lender or with a financial adviser who can help you weigh the options against your needs and retirement plans. You can also use LendingTree’s reverse mortgage calculator to see how this kind of loan might work for you.