August 2010 - Tapping into Reverse Mortgages - As fees drop, some people tap reverse mortgages as a way to keep their homes.
Upfront fees on reverse mortgages have fallen substantially in recent months, giving homeowners interested in this product a new challenge: how to best compare offers to find the best one.
Few lenders have reduced origination fees. Infact, some of them are getting rid of the origination fees. Some are willing to pay some of the mortgage-insurance premium fees up front. It's an important development for reverse mortgages, which have in the past faced criticism for charging high upfront costs.
A reverse mortgage allows homeowners tap their home's equity while they remain in the house. The amount available to the homeowner depends on his or her age and the home's appraised value, among other things. Payments can be made in a lump sum or in regular installments, or a home equity line of credit can be established, according to the Department of Housing and Urban Development's website. Visit the HUD website.
Reverse mortgages are available to homeowners who are 62 years old or older and own their homes outright or have a substantial amount of home equity, according to the HUD site. The vast majority of reverse mortgages are insured by the Federal Housing Administration, through the Home Equity Conversion Mortgage (HECM) program.
The reduced fees on reverse mortgages are a result of another important industry development: investor demand for securities backed by those mortgages. These securities are backed by Ginnie Mae, based on a reverse mortgage insured by the FHA, its a very secure investment.
Investors are willing to pay a premium for that kind of safety with a higher yield. And lenders are essentially passing on some of that premium to borrowers in the form of lower fees.
The origination fee is often a few thousand dollars, with a $6,000 maximum. The upfront mortgage insurance premium is 2% of the lesser of your home's value or the FHA's HECM mortgage limit for the area, according to HUD's website. Some lenders are covering all or part of these costs.
That means more work for prospective borrowers to compare loans. One lender might reduce the origination fee, another might waive the origination fee but raise the interest rate, and another could change the servicing fee.
Consumers need to get the full details of the offer from the lender, and need to analyze them and compare them which is required to qualify for the FHA HECM program, also can help borrowers sort through their options
