Reverse Mortgage Market : Recent Updates
According to various market analysts and experts and reports by Department of Housing and Urban Development (HUD), the number of reverse mortgage applications fell by around 38.8% that is 8,249 units in the month of October, 2010. However, the volume of origination on the overall basis is still reported to be down and it is 36% less from what it was in 2009. The total number of applications are said to be around 175,421 in October, down by 31.5% in comparison to the previous month.
What actually a reverse mortgage is?
A reverse mortgage is a type of home mortgage that is taken out by the seniors or by the elderly individuals who are above the age of 62. Refinance rates allows such elderly individuals to make use of the equity trapped in their houses. The proceeds from a reverse mortgage can be used for paying off the original home mortgage on the home and meeting various financial needs. The proceeds of a reverse mortgage are obtained either in the form of multiple payments or a lump sum payment and is different from a traditional or a conventional mortgage.
In case of the traditional home mortgages, you are required to make payments on it each month. However, in case of reverse mortgage, as the name suggests, it is the reverse of a traditional mortgage. In reverse mortgage, it is the lender who pays you (that is the loan amount in installments or in lump sum as said before) and the payments on your part will have to be made by your heirs after your death. The best thing about any reverse mortgage is that you won’t ever owe more than the actual value of your home. However, it is not good for all, as reverse mortgage has always been quite expensive. But recently there have been some changes in the market.
Reverse mortgage getting affordable
Traditionally reverse mortgages has always been quite an expensive type of mortgage. Not all elderly people were able to opt for it. But there have recently been some changes for the good. Since the slowdown of the housing market due to the economic downturn, reverse mortgage application had decreased and lenders are now doing their best to attract quality borrowers.
A new kind of reverse mortgage has been introduced on October 4, 2010 known as the Home Equity Conversion Mortgage Saver option or HECM Saver. The upfront insurance premium on this mortgage is cheaper as compared to the other reverse mortgages. Mostly, reverse mortgages are insured by the Federal Housing Administration or FHA. This type of mortgage insurance protects the lender from losses against reverse mortgages but the borrowers are required to pay the cost. Now, with the introduction of the Home Equity Conversion Mortgage Saver option you can pay less than usual.
For example, if the estimated value of a home is $80,000, the reverse mortgage would cost around $10,500. That would include $6,500 towards the closing costs as put up by the U.S. Department of Housing and Urban Development for things like insurance, origination fee and other financing costs, along with some additional $4,500 to $5,000 for a $30 monthly service fee. Apparently, these fees could be rolled into the mortgage, requiring very little costs, but they still made the loan a costly option. Now, the lender requires paying most of those fees or waived off on a fixed-rate HECM. That same house which cost around $80,000 may now have closing costs of around $3,000 and origination fee of $1,200. The monthly service charge has been waived off by HUD, and the insurance premium is now paid by the lender. With the introduction of HECM Saver, even smaller home mortgage or loans will be available for the seniors.
According to the reports, with the introduction of the HECM Saver option, the numbers of reverse mortgages are expected to increase by around 6% that is to a number of around 85,217 in the financial year 2011. It is expected to continue to increase to around 144,361 by the financial year 2016.
There have been some other changes too in the home mortgage market especially in regards to reverse mortgages. According to the vice president of National Council on Aging, most of the lenders have reduced the origination fee on reverse mortgages. This means more savings for the borrowers. But you will have to keep in mind that with the lowering of the fees, the interest rates can increase. However, the national loan limit for the HECM program still remains at $625,500 and the maximum claim amount on such mortgages too remains the same, which is $625,500. This loan limit is said to be effective for all kinds of FHA reverse mortgages that have been assigned a case number on January 1, 2011 and after January 1, 2011 through September 30, 2011.
According to market research, in order to protect the seniors, HUD has also introduced more counseling requirements in case of reverse mortgages in the month of September. The seniors before taking out a reverse mortgage will have to go for counseling and this has been made mandatory. This has been done for the advantage of the seniors so that they fully understand the terms and conditions of the reverse mortgage. It is always better to take an informed decision rather than taking an uninformed one as this can create problems later.
The financial specialists opine that all these changes together will perhaps be beneficial for the seniors. But till now, not all of the seniors are suited to take out a reverse mortgage on their home. It is also said that, the changes in the reverse mortgage trends will not only benefit the seniors but are also beneficial for the government. The lowered payout of HECM saver program is supposed to reduce the risks to the insurance fund of the government.