One of the most attractive options for seniors who needed a large lump of cash was the standard fixed rate Home Equity Conversion Mortgage Loan (HECM) offered by the Federal Housing Administration (FHA). This type of reverse mortgage was designed to help senior home owners who are in need of a large sum of money especially for things like medical bills.
This type of loan, sometimes in the hundreds of thousands of dollars, is responsible for most defaults associated with reverse mortgages, so the Federal Housing Administration will no longer allow senior borrowers to get a fixed rate on HECM reverse mortgages. The only reverse mortgage loan that will come with a fixed-rate option is the HECM Saver loan, which has a much lower borrowing limit than the standard HECM loan.
What is the Home Equity Conversion Mortgage?
The Home Equity Conversion Mortgage is a type of reverse mortgage insured by the Federal Housing Administration. The HECM reverse mortgage allows senior home owners over the age of 62 to convert the equity in their property to cash. Factors that affect the size of the loan are the borrower’s age and the appraised value of the home.
Unlike conventional loans, which have strict lending requirements, HECM loans are given out without a credit check, and the money doesn’t have to be paid back until the home is sold or the owner dies.
Why Was a Change in Reverse Mortgages Necessary?
The large increase of reverse mortgage defaults has determined the Federal Housing Administration to stop giving out fixed-rate standard HECM loans. Back in 2012, 10 percent of the mortgages insured by the FHA were in default, an 8 percent increase over a decade ago. The FHA is looking at an estimated loss of $2.8 billion, which may force them to ask for a bailout from the federal government.
Reverse mortgages are great for seniors who need quick access to money for medical bills, but sometimes these loans are as high as a few hundred thousand dollars. Borrowers end up spending the whole amount too soon and defaulting, or not having enough money to pay for their property taxes and homeowners insurance.
Reverse mortgages are not for everyone. Seniors who don’t have access to cash, but live in an expensive home can better take advantage of this type of loan. However, reverse mortgages come with high closing fees and high interest rates, so they shouldn’t be your first choice even if you easily qualify. Many seniors took out a reverse mortgage loan because it seemed attractive, but ended up in default because of poor money management and not paying close attention to all that this type of mortgage loan entails.
Reverse mortgages have always been a great choice for a certain type of borrower. Now, with the change to interest rates, they will most likely decrease in popularity. Before going this route, you should look into a conventional loan first, make a careful comparison between your options, making sure that you don’t end up defaulting and having to give up your home.