Types of Reverse Mortgage Programs
If you are looking at a government-insured HECM mortgage, you have various types of reverse mortgage programs available to you. You can get a Fixed Standard HECM, a Fixed Saver HECM, an Adjustable Standard HECM Line of Credit or Monthly Income or combination of both, or an Adjustable Saver HECM Line of Credit or Monthly Income or combination of both. All of these are options for refinancing your current residence, but you can also use a reverse mortgage to purchase a primary residence.
Fixed Standard HECM - This product may be the most popular. It offers a rate that's fixed for the life of the loan (currently in the 4.00% to 5.56% range), and usually offers the most money to the borrower. At the close of the loan, the borrower receives in a lump sum whatever amount they are qualified to receive, after loan costs and paying off whatever the current mortgage balance is, if any. The borrower can use these funds however they choose. The funds can be put in a regular savings or CD account, can be invested, can be used to purchase a rental property, pay medical bills, or whatever.
Fixed Saver HECM - This product was introduced in September 2010 by FHA Mortgagee Letter 2010-34. It still offers a fixed rate, but the up front mortgage insurance required is only .01% of the value of the home, instead of the usual 2%. To compensate for the lower insurance amount, the monetary benefit to the borrower is also reduced. This product was developed in answer to people who said they wanted a fixed rate, but didn't want or need the big amount in the lump sum. This way the lump sum received is a smaller amount, and the up front loan cost is reduced by quite a bit. The product has been well received, but the interest rate, currently in the 4.5% - 6.0% range, tends to be significantly higher than with the Fixed Standard HECM.
Adjustable Standard HECM - If you don't want or need a lump sum at close, and if having an adjustable rate is acceptable, you can select a line of credit, or to receive a monthly payment (annuity), or some combination of those. The line of credit or monthly payment will usually get you less money than the fixed option, because although the initial interest rate (calculated by a standard index plus a margin) may be lower than the fixed rate, FHA calculates what the "Expected Lifetime Rate" will be, an average over the life of the loan, and this is usually higher than the fixed rate. So if you get less money and you don't have a fixed rate, why would someone choose this option? The profile that best fits this option is the borrower who has no mortgage, or very little mortgage to pay off, and has no immediate need for a larger sum of money. They are getting the reverse mortgage because they want a more modest amount of money coming to them regularly, either in monthly payment form or available via a line of credit. This means the loan balance will stay low, and the equity position will remain stronger, over against the higher loan balance that comes with a lump sum payoff.
Adjustable Saver HECM Saver - This works the same as the Adjustable Standard HECM, but as with the Fixed Saver, the up front mortgage insurance is only .01% of the home value, keeping loan costs down. If an emergency comes up, they can use the line of credit instead of disturbing their other investments, and they won't have to make payments on that emergency money. If an emergency doesn't come up, the loan balance remains low and they retain a lot of equity.
HECM for Purchase - This option was created in October 2008 with FHA Mortgagee Letter 2008-33, taking effect January 1, 2009. This program was designed to assist seniors who wanted to remain independent, but for whom their current residence was inadequate.
Let's say a couple lives in a large, 2-story home that needs repairs. The stairs to the second story now represent an obstacle, and they don't want or need a place that big any more. However, they no longer have enough income to qualify for a regular purchase mortgage, even if they get enough from the sale of the home for good sized down payment on a smaller home. Even if they did qualify for the mortgage, they foresee income declining down the line, and/or medical or other expenses increasing, and the money for mortgage payments could be well used elsewhere. Without a HECM for purchase program, they would be stuck. At the very least they would be faced with the costs of a regular mortgage for purchase, then turn around and face the costs of a reverse mortgage to refinance and eliminate the mortgage payments. Now they can simply purchase directly with a reverse mortgage.
Purchasing a home with a reverse mortgage will typically mean getting the Fixed Standard HECM option, because you need the most money possible in a lump sum to buy the home. Remember the HECM program still requires a good amount of equity, so you will need to be able to put down a good sum as down payment, about 35% if the youngest borrower is 67. Remember also you can only do this with a home that will be your new primary residence, occupying it at least 50% of the year.