the Benefits and Disadvantages of Reverse Mortgages.
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What is a Home Equity Conversion Mortgage (HECM)?
The most popular reverse mortgage product is the Home Equity Conversion Mortgage (HECM). This type of reverse mortgage is insured by the federal government through the Federal Housing Administration (FHA) which is a part of the Department of Housing and Urban Development (HUD).
Funds available to seniors through the HECM are determined by the age, appraised home value, and the current interest rates. The older you are, the higher the value of the home, the less you owe on the home, the more funds you’ll be able to qualify for with this HECM.
The amount of the HECM depends on the state or county maximum lending limits. FHA limits may vary anywhere from $200K to $360K (as of 2007). The FHA will also cap many of the upfront fees associated with a reverse mortgage.
For a reverse mortgage, you’ll pay a mortgage insurance premium (MIP) equal to 2% of the maximum claim amount. plus an annual premium after that of .5% of the loan balance. This MIP is paid to the FHA for guaranteeing the loan.
As an example, if your home is worth $300,000 and the maximum lending limit is $265,000, the upfront MIP will be $5300 ($265,000 x 2%). This MIP guarantees that if the company that services your loan goes out of business, the government will make sure you have continued access to your loan funds.
This MIP also guarantees that you will never owe more than the value of your home when the HECM comes due. HUD also limits the fee that a lender can ear to 2% of the maximum claim amount. The lender would earn anywhere from $4,000 to $7,000 which is comparable to what you would pay a lender to purchase a home with a traditional mortgage.
You will also have other standard closing costs associated with a mortgage including title insurance, attorney fees, recording taxes, etc. Getting a Utah Reverse Mortgage is not complicated but should be done after understanding the benefits and disadvantages of a reverse mortgage so you understand exactly what you’re getting.
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