Difference between HECM
Michael Branson (CEO All Reverse Mortgage Company) 1/30/08 4:08pm
You've made the decision to get a reverse mortgage and now you talk to a bank or mortgage broker and the representative is telling you that you have a choice of the Government Home Equity Conversion Mortgage (HECM or "Heck-um") or a Jumbo or "Proprietary Program". Is one better than the other? Is one more expensive? Is one more risky? Let's see if we can't cut through some of the fat and get to the meat of the issues.
Let's start in reverse order of the questions above. Which is riskier, a jumbo reverse mortgage or a government HECM? In today's uncertain times with lender's failing daily, what would you do if your reverse mortgage lender had to close? That could present a problem if you are receiving a monthly payment from your reverse mortgage for a set period of time or for life (known as a term or tenure payment). If you have the Government HECM mortgage, you paid insurance when you got the loan which insures that you will always receive your payments, even if the US Department of Housing and Urban Development (HUD) has to take over the payments on your mortgage. The jumbo reverse mortgages have no insurance. Since the reverse mortgage the lender holds is an asset, they would probably sell it to another lender and you would probably be ok. Remember, they can't take your home, you own it, but if they couldn't find a new lender quickly enough and you had a stream of payments coming in from the reverse mortgage, HUD will not step in to make sure you receive all your payments on time for that proprietary program. It does not put your property at risk, but you might have to find a new lender and refinance your reverse mortgage which may or may not be an easy feat depending on what has happened to your loan balance and property value. However, if you take all your loan proceeds out at the time your loan funds (for example you use all your reverse mortgage to pay off an existing mortgage or pull all the funds out up front for another purpose) then there is no income stream to interrupt. So if you're concerned about risk, then you need to ask yourself how you want your money paid, all at once or in monthly payments. The lender's going out of business would not adversely affect you at all if you already have all your money and insurance is not necessary.
Which is more expensive, a jumbo reverse mortgage or a HECM? This depends on how you look at it! Most of the third party costs are comparable (things like escrow fees, title insurance, appraisal fees, etc. with the only differences being that larger loan amounts typically require slightly higher fees). Most programs also limit the amount of the origination fee that can be charged to the borrower. The HUD HECM loan is currently 2% of the maximum lending limit for the area (although this may be lowered making it a little less costly with pending legislation in congress now) and most of the proprietary programs also limit the amount of the fee that can be charged to the borrowers. The real difference in the fees is usually that HUD HECM's also charge fee of 2% for mortgage insurance. This can bring the up-front costs of a HECM up substantially, especially when compared to a program that offers the borrower no origination fees – which some of the proprietary programs do. However, you can't stop at the closing costs alone! The next thing that you have to be concerned with is the amount of money you want/need, how much of that you are taking at the beginning of the loan and your ultimate goal. If you want or need a loan amount which exceeds the HUD Limits for your area, then the only way to get the HUD financing is to bring your own money in to closing (as in the case of the payoff of an existing lien above the HUD Limit) or you would be forced to take less cash to get the HUD loan if you were set on just having the government insurance. If this is not an option for you, then the up-front costs are not as important as the amount of cash you can actually put in your pocket when the deal is all said and done. Also, if the two amounts are close, I always advise borrowers to look at the amortization schedules. These are the print outs that come with each mortgage that tell you how much your loan balance is at the end of each year when all the costs and interest are added. Most jumbo reverse mortgages have higher interest rates and at the end of 2, 5, and 10 years, there can really be a huge difference in the cost of the two programs, with the higher interest rate program owing much more money. If your concern is how much the fees are because you don't want to eat up unnecessary equity (because you don't usually pay them out of pocket anyway), this would not make much sense.
The last question of "is one better than the other" is easy and the answer is "No, as long as you pay attention to the first two questions!". The loan that is "best" is the loan that is best for YOU and YOUR needs or goals. As long as you understand what the differences are and how those differences affect you, your equity and your goals, you can choose the program that's right for you.Michael G. Branson (CEO All Reverse Mortgage Company)is a Mortgage Broker who has over 31 years of mortgage banking experience. Toll Free (888) 801-2762