HOME EQUITY Conversion Mortgage

The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for an estimated 90 percent of the total market. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

The amount of available proceeds you can qualify for under the HECM program depends on your age, appraised home value, and current interest rates. The older you are, and the more valuable your home (and the less you owe on your home), the more funds you qualify for. Another factor is your home's location. The size of a HECM depends on the maximum lending limit, which varies by county. Currently (for 2007), FHA limits vary from $200,160 to $362,790.

If your home's value exceeds the FHA lending limit, the amount of money you are eligible to receive will be calculated as if the value of the home is the area limit. Practically speaking, if your home is worth $600,000, but the county lending limit is $362,790 (current maximum limit), then the loan amount will be based on $362,790. Conversely, if your home is worth $200,000, and the county lending limit is $275,000, then your loan will be based on the lower amount.

Many of the upfront fees associated with the HECM are capped by FHA. Currently, you pay a mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (the value of the home or FHA county lending limit, whichever is less), plus an annual premium thereafter equal to 0.5 percent of the loan balance. The MIP is paid directly to FHA in exchange for guaranteeing the loan.

As an example, if you own a home worth $275,000 in a county where the lending limit is $225,000, the upfront MIP will equal $4,500 ($225,000 multiplied by 0.02). The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.

HUD limits the fee that a lender can earn to 2 percent of the maximum claim amount (again, this number is equal to the value of the home or FHA county lending limit, whichever is less). Depending on where you live, the lender earns anywhere from $4,003 to $7,256, which is comparable (perhaps even less) to what you would pay a lender to purchase a home in today's market.

In addition to these two primary fees, you will also pay other standard closing costs associated with getting a mortgage, including title insurance, attorneys fees, recording taxes, etc.

FANNIE MAE Home Keeper Product

Headquartered in Washington, DC, Fannie Mae is the nation's largest investor of home mortgages and a major investor of reverse mortgages, including the federally insured Home Equity Conversion Mortgage (HECM).

In 1996, Fannie Mae developed its own proprietary Home Keeper® reverse mortgage as a conventional market alternative to the HECM. The Home Keeper was developed to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners, and seniors wishing to use a reverse mortgage to purchase a new home.

Fannie Mae is not a lender. With Fannie Mae's permission, lenders can offer the Home Keeper product to consumers, like yourself.

The Home Keeper is available in every state to homeowners 62 years of age and older. Eligible property types include owner-occupied single-family homes, condominium units, and units in qualified planned unit developments. Properties held in trust and qualified leasehold properties are also eligible. Cooperative units, however, are not an eligible property type for Home Keeper.

The amount of funds available to the borrower is determined by a formula and varies with: (1) the age and number of borrowers at the time of application; (2) the adjusted value of the home; and (3) current interest rates. Home Keeper loans can be larger than HECMs because Fannie Mae's maximum mortgage limit – $417,000 for 2006 – is larger than the locally applied FHA maximum mortgage limit.

A consumer may choose to receive the funds from a Home Keeper as: (1) fixed monthly payments for life (i.e., for as long as the borrower occupies the home as his/her principal residence; (2) a line of credit; or (3) a combination of monthly payments and line of credit. Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the adjusted value of the home, whichever is greater, a monthly servicing fee ($15-$30), and other closing costs. Many of these can be financed and included in the mortgage.

The interest rate charged on a Home Keeper reverse mortgage adjusts monthly and is equal to a fixed spread above an index rate – the current weekly average of the one-month secondary market CD rate, which is published by the Federal Reserve. The rate may never rise by more than 12 percentage points above the initial rate; there is no cap on a monthly adjustment other than the lifetime cap.

One interesting feature of the Home Keeper is that you can use the program to purchase a new home – all in a single transaction. The transaction reduces the out-of-pocket cash needed to buy a new home, eliminates any new monthly mortgage payment, and helps you keep more of the sales proceeds from the old house – or a larger amount of savings – to use for other purposes.

To provide a better illustration, let's say a 76-year-old woman sells her home for a $75,000 profit and wants to buy a new home in sunny Florida costing $115,000. To avoid a mortgage payment on the new house, she would need to pay $115,000 in cash. This means she would have to use the entire $75,000 from the sale of her first home, plus another $40,000 from her savings. If she doesn't have the $40,000, she couldn't buy the new house, unless she qualifies for a new home mortgage, which might be difficult and which in any event would require making monthly mortgage payments again.

Alternatively, the woman could purchase the new home outright, or nearly so, using money from a Home Keeper reverse mortgage, plus the sales proceeds from her old house.

This product might be used, for instance, by older homeowners who want to sell their old home and move closer to their children or to a warmer climate, or to move into a home that provides greater accessibility.

Home Keeper is a registered trademark of Fannie Mae