Choose the right reverse mortgage

House next to bundles of money

If you've thought about getting a reverse mortgage on your home but have been turned off by the up-front charges, the government has created a second option that could save you money.

In October 2010, HUD announced a new option to its Home Equity Conversion Mortgage, called the HECM Saver, that nearly eliminates the mortgage insurance premium, or MIP, an up-front charge of 2% of the home's value.

The MIP on the HECM Saver loan is a negligible 0.01% of the home's value. On a $200,000 home, that means paying $20 instead of $4,000.

What's the catch? In return for the lower MIP, the amount you can borrow is between 10% and 18% less, depending on your age, than you can get with the traditional HECM Standard reverse loan.

Other than that, the rules on both types of loans are pretty much the same. You don't have to pay the money back as long as you remain in your home. In addition to the up-front MIP, both loans carry an annual insurance premium of 1.25% on the outstanding loan balance. You must be at least 62 years of age to qualify and attend a HUD-approved counseling session.

The amount of money you can borrow is determined by your home's value, the interest rate on the loan and the age of the borrower. Generally, the older the borrower and the lower the rate, the more money you can borrow.

Neither program requires a credit check or proof of income. With either loan, you are required to pay all property taxes and homeowners insurance and pay for any necessary repairs. You can use the proceeds to buy a new home.

The way to access your loan funds is the same for both options: a lump sum payment, a line of credit, fixed monthly payments or some combination.

If you decide to investigate further, here's how to help choose which reverse mortgage is best for you:

Standard

Who is it best for? The Standard is probably the better loan if you need to borrow the maximum amount, you need the money to pay for a large percentage of your living expenses and you intend to stay in your home permanently.

How much can I expect to borrow? A 75-year-old man with a 5% interest rate could borrow 69.3% of his home's maximum borrowing amount with a standard reverse loan, or about $138,600 on a $200,000 home.

What are the up-front costs? The up-front mortgage insurance premium is 2% of the value of the home. On a $200,000 house, that's $4,000. In addition, your lender may charge an origination fee of as much as 2%, up to $6,000. You will also have to pay traditional closing costs as you would on a conventional mortgage, such as an appraisal fee, title search fee, insurance and taxes.

Saver

Who is it best for? The Saver may be a better option if you don't need as much money as you could get with a standard reverse loan. You may, for example, intend to use the money as an emergency line of credit, to pay down some debt or to finance a major project, like a home remodeling. It also may be a better option if you think you won't remain in your home for a long time.

How much can I expect to borrow? With a Saver, the 75-year-old man in our example could borrow 56.2% of the home's maximum borrowing amount, or $112,400, about $26,000 less than with a Standard loan.

What are the up-front costs? The MIP is just 0.01% of the home's value, or $20 on a $200,000 home. In addition, you can expect to pay origination fees and traditional closing costs.

Whichever option you choose, be sure to shop around. Competing lenders charge different origination fees. Many lenders have recently reduced or waived their origination fees, so this may be a good time to shop.

To estimate how much you can borrow against the value of your home under either HECM Standard or Saver scenario, visit the AARP reverse mortgage calculator. You will have to enter the year you were born, your home value and your ZIP code. Under HUD rules, you can borrow up to the lesser of the appraised value of your home, the mortgage limit for your area or the sales price.

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