A reverse mortgage enables older homeowners who are 62-years old or older to convert the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

While talking with senior homeowners, we here at the National Reverse Mortgage Lending Association find that there are many people who need access to funds, but are concerned about the up-front costs associated with reverse mortgages. Some are not sure how long they might remain in their homes, while others are in need of funding to solve a specific problem, such as supplementing their monthly income until their retirement accounts regain value lost during the recession.

The reverse mortgage industry, in concert with the U.S. Department of Housing and Urban Development (HUD, has responded by creating a new variation on the Federal Housing Administration (FHA) insured Home Equity Conversion Mortgage (HECM) that is referred to as the HECM Saver. While the traditional HECM, now referred to as the HECM Standard, will provide a borrower with a larger amount of money, a HECM Saver has the lowest up-front fees.

This new HECM Saver opens reverse mortgages to a much wider range of uses, including as an alternative to home equity line of credit. It is difficult, however, to explain how the HECM Standard and the HECM Saver products differ without a solid understanding of reverse mortgage fees.

WHAT FEES ARE THERE ON A REVERSE MORTGAGE?

FHA insured reverse mortgages, like all mortgages and financial products, have costs associated with them, and it is important that borrowers understand the fees being charged to them before they sign on the dotted line. Because HECM loans are insured by the federal government, all fees are regulated and limited by HUD. There are three types of fees that might be charged on a reverse mortgage: the FHA mortgage insurance premium, loan origination fees, and servicing fees.

The FHA mortgage insurance premium (MIP) is an amount paid to the federal government (HUD/FHA) to insure the reverse mortgage. Part of the MIP is paid as an upfront fee calculated as a percentage of home value, and part is an ongoing annual fee, calculated based upon the actual outstanding loan balance and added to the balance annually. This insurance protects borrowers and lenders by allowing borrowers to only repay the appraised value of the home regardless if the mortgage balance has increased to more than the home is worth. It also insures that loan proceeds will always be available to the borrower, even if the lending bank is, for some reason, unable to pay. Indeed, the MIP gives the borrower an extra level of security that the federal government is insuring the performance of their loans.

Loan origination fees charged by lenders of reverse mortgages are determined by a formula based on home value determined by HUD, and this fee is capped at $6,000 overall. Depending on market conditions and competitive pressures, some lenders choose to charge less than the maximum allowable fee or to waive this up-front fee entirely.

Reverse mortgage loans also incur the typical appraisal, title and recording fees associated with the origination of all mortgage loans.

A servicing fee is assessed on a monthly basis by the reverse mortgage loan servicer and is capped at $35 per month. Many lenders are currently waiving a set monthly servicing fee and instead are covering the servicing costs by slightly increasing the rate at which interest is accruing on the loan.

HOW DO HECM SAVER FEES DIFFER FROM HECM STANDARD FEES?

HECM Standard loans are assessed an up-front mortgage insurance premium (MIP) of 2% of the home’s value, plus an annual mortgage insurance premium of 1.25% of the outstanding balance on the reverse mortgage. In the HECM Saver, however, the upfront MIP is reduced to 0.01%. The reduction in the upfront MIP from 2.0% to 0.01% reduces this expense from thousands of dollars to tens of dollars. In exchange for the reduced fees, the loan amount for the HECM Saver is roughly 10 to 18% less than that of the HECM Standard. All other fees, however, remain the same.

HECM STANDARD VS. HECM SAVER

Which reverse mortgage product is the right choice for you? Like most things in life, the answer depends on a variety of factors. The HECM Standard loan might be better for a borrower who is using a reverse mortgage to pay-off a large forward mortgage or needs a large chunk of money to pay for home repairs or medical care. However, if you are looking for access to cash from your home, and do not necessarily need the higher loan amount, a HECM Saver could be the right choice for you.

Indeed, the HECM Saver is an option to consider if you are thinking about obtaining a traditional home equity line of credit -- but want to avoid current loan payments. The HECM Saver virtually eliminates the fee difference between these two products, and I encourage those interested in learning more to talk to a NRMLA member lender about how a reverse mortgage might serve your needs.

Peter Bell is the president of the National Reverse Mortgage Lenders Association.