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.