Reverse Mortgages Explained

• The purpose of a home equity conversion mortgage (HECM), or reverse mortgage, is to provide access to equity in a home without requiring the homeowner to sell her property. These mortgages are available only for homeowners over the age of 62 and for those who own their home outright or have only a small mortgage outstanding. Furthermore, the mortgagee must not be delinquent on any government debt and must occupy the home as a primary residence. As opposed to a conventional mortgage, an HECM requires no regular payments and is engineered so that the balance of the loan will be paid off upon sale of the property.
  
  

Insurance Coverage

• Insurance coverage for this kind of mortgage ensures that the mortgagee receives advance of all funds to which he is entitled and that the balance of the debt will be covered in the event of substantial decreases in the value of the property at the point of sale. The U.S. Department of Housing and Urban Development's Federal Housing Administration (FHA) provides the insurance as a feature of all HECMs.
  
  

Cost

• The cost of this insurance varies and requires both one-time and recurring payment. The initial, one-time payment is 2 percent of the lesser of the appraised value of the home, sale price of the home or the FHA HECM mortgage limit and is paid upon closing. In addition to this initial cost, an annual fee of 1.25 percent of the mortgage balance is charged as an insurance premium.
  
  

Reduced-Cost HECM

• An alternative, lower-cost HECM exists and significantly reduces the upfront insurance cost of the mortgage. This "HECM Saver" charges a meager 0.01 percent of the same home valuation as would be charged to the standard HECM upon closing of the mortgage. However, only low-dollar-value mortgages qualify for this discount, and those who require a larger loan must relinquish the standard fee. The Saver mortgage insurance charges the same 1.25 percent annual premium and provides the same coverage as the standard HECM.