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Older homeowners who have spent years building up equity may be tempted to cash out through a reverse mortgage. But high fees can make these loans pricey.

A new government program reduces some of the expenses. In October, the Federal Housing Administration, the unit of the Department of Housing and Urban Development that runs the reverse mortgage program known as Home Equity Conversion Mortgage, or HECM, introduced the Home Equity Conversion Mortgage Saver, or HECM Saver.

HECM (pronounced HECK-um) Saver trims the upfront insurance premium due at closing to 0.01 percent of a property’s value, from 2 percent. But the amount that can be borrowed is also reduced, by 10 to 18 percent, compared with the standard HECM loan program.

Still, Stanley Gil, a reverse mortgage consultant in Garden City, N.Y., said, “I think we’re going to see a lot of people using it.” The loan “is really going to help people who need some extra cash and have built up equity in their home,” he added.

And AARP says the Saver loan would work well for those homeowners who did not need to borrow the maximum allowed — which is $625,500, based on a property’s value and the interest rate of the reverse mortgage, among other things. HUD provides calculatorsto help determine how much can be borrowed, and AARP offers advice on its Web site.

Reverse mortgages essentially release the equity in a property as cash that can be used for expenses like health care or home renovations, while at the same time paying off whatever remains on the mortgage.

The loans leave homeowners with no monthly mortgage payments; they become due, with interest and other fees, when the owners die, move, or sell the property — or if they fail to maintain the property or keep up with property taxes and insurance.

The leveraged property must remain a primary residence, though, and only single-family homes qualify — as well as buildings with one to four units, provided at least one of the units is occupied by the borrower. Among the other restrictions is age. Anyone who is an owner, and is listed on the title to the property, must be at least 62.

Reverse mortgages boomed in recent years but then acquired a bad reputation, in part because of their costs. Origination fees for the loans are now capped at $6,000, while other closing costs are about equal to those for a conventional mortgage. Until HECM Saver, the upfront insurance premium was a major additional cost that could run as high as $12,510.

Fixed-rate reverse mortgages typically run 0.25 to 1.25 points above conventional mortgages; they now generally range from 4.99 percent to 5.25 percent, depending on the loan size, compared with an average 4.91 percent for a 30-year fixed-rate conventional mortgage.

The tax-free payout in a reverse mortgage, which can also carry an adjustable rate, can be taken in a lump sum or parceled out monthly, providing a steady income stream. The loans don’t require a minimum credit score or have income limits. But borrowers cannot be underwater, or owe more on a current mortgage than the property is worth.

The F.H.A.-backed version of the reverse mortgage — the most popular — is still unavailable to co-op owners. Lemar C. Wooley, an agency spokesman, said the F.H.A. was “currently evaluating the HECM program for co-ops to determine if it would meet our financial requirements.”

Consumers Union, the independent nonprofit testing organization that publishes Consumer Reports, says cash-needy homeowners should consider a home-equity loanbefore a reverse mortgage, because of the high closing costs and insurance fees.

Reverse mortgages may not be suitable for homeowners who want to leave their property to heirs, mortgage experts say; often the loan must be paid off through the sale of a home, although the note may be refinanced.

SOME affluent homeowners have been walking away from a second home or investmentproperty that is worth less than what is owed on the mortgage, even though they can still afford to make the payments.

But dumping that beach condo or country cottage, or even a home bought for an adult child — a practice known in the industry as a “strategic default” — is not the same as discarding a poorly performing stock or bond. Among the lingering effects is wrecked credit that can prevent the homeowner from getting another loan of any kind for 7 to 10 years.

In July, a study by researchers from the European University Institute, Northwestern University and the University of Chicago concluded that the strategic default trend was “large and rising” among homeowners with an equity shortfall of $100,000. As of last March, it said, strategic defaults accounted for 35.6 percent of all foreclosures, compared with 23.6 percent a year earlier.

“I’m increasingly seeing people who are middle class or higher on the pay scale coming to the conclusion that ‘I may be able to carry it, but should I?,’ ” said David Shaev, a bankruptcy lawyer in New York who assists homeowners in distress.

“But the question is, can the bank come after you, and if so, what is your position? What is your liability?”

The answer depends largely on where the property is.

In “recourse” states, a lender can come after you, and usually other assets like a primary residence, for the full mortgage amount. In “nonrecourse” states, a lender agrees to accept whatever the property fetches at a short sale, foreclosure sale, or a deed-in-lieu, in which the property is taken back but not formally foreclosed on, and generally can’t sue for the full loan amount. Connecticut and Arizona are among the nonrecourse states, while Florida, Colorado, Maine, New Jersey and Hawaii are recourse states.

There is a third category of state, called “single-action” or “one-action,” which allows the lender either to foreclose on the owner or file a civil lawsuit for the full loan amount. New York, California and Idaho are in that category.

Even in a nonrecourse state, however, those homeowners who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in such a case was not accorded for a first purchase, said Philip Faranda, a mortgage broker for J. Philip Real Estate, in Briarcliff Manor, N.Y.

When home-equity loans are involved, he added, it gets more complicated. In nonrecourse states like Florida and Connecticut, the lender cannot sue to collect anyhome-equity loan taken out on the property. But in nonrecourse states like Arizona and California, the lender can still sue for repayment of a second mortgage or line of credit.

Filing Chapter 13 bankruptcy protection, in which the homeowner arranges to pay off debts at lowered amounts over a maximum of five years, is typically the only way to avoid being on the hook for the second loan, mortgage experts say. Affluent homeowners who strategically default on a second home often don’t qualify for Chapter 7 bankruptcy, which leads to liquidation but limits eligibility to those earning no more than state median income levels.

Though not illegal, strategic defaults are controversial, because they are viewed in some circles as unethical. The practice is common among property developers.

For homeowners under water, experts say, it can make economic sense. “It’s a business cash-flow decision,” Mr. Faranda said, “but the risk is that you’re rolling dice with your future credit.”

A foreclosure from default stays on a homeowner’s credit report for 7 years, while filing for bankruptcy stays on the report for 7 to 10 years, he said. A default can lower a credit score by 85 to 160 points, according to FICO, the company that created the scoring method.

This article has been revised to reflect the following correction:

Correction: December 19, 2010

The Mortgages column on Dec. 5, about defaulting on second homes, described incorrectly the ability of lenders to sue homeowners in Florida for the amount owed on a foreclosed property. Florida is a “recourse” state, and lenders may sue homeowners there. It is not a “nonrecourse” state, where lenders typically are required to accept whatever a property sells for in a foreclosure sale.

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With demand rising for reverse mortgages, senior citizens are particularly at risk of being misled and should be protected by greater government oversight of the industry, according to a report by Consumers Union and two California advocacy groups.

In a struggling economy, older homeowners are turning to reverse mortgages as a way to pull money out of their homes, with the loan not coming due until the borrower dies. But the loans can come with hefty charges, including origination fees, closing costs and compounding interest on loan principal.

“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, senior staff attorney for Consumers Union.

“Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income,” she said.

The report was released Tuesday by Consumers Union, the nonprofit publisher of Consumer Reports magazine, along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley. It warned that seniors taking out reverse mortgages risk losing their homes while they’re still alive.

The groups called for strong oversight from the new federal Consumer Financial Protection Bureau, which is being launched by Obama administration appointee Elizabeth Warren as part of financial reform legislation passed this year.

The report lists concerns including misleading marketing claims by lenders; attempts to sell borrowers other products at the same time, such as long-term-care insurance or annuities, and an increasing number of borrowers defaulting on reverse mortgages, triggering foreclosures.

Consumers Union offers tips about reverse mortgages on its website, http://www.consumers.union.org.

The site’s offerings include information about applying for government benefits for seniors, getting advice from local Housing and Urban Development counselors and seeking a so-called private reverse mortgage — a loan from a family member using the senior’s home equity as collateral.

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Senior homeowners are having difficulty in their financial lives due to a variety of reasons and, as a result, there are indications that more homeowners are turning to reverse mortgage loans as a way to access capital from their home’s equity. FHA reverse mortgage loans have been helpful to certain homeowners, but some financial advisers are cautioning homeowners before they proceed with this type of mortgage and suggest that senior homeowners seek out other options first.

Typically, when a reverse mortgage is concerned, especially one offered by the Federal Housing Administration, a homeowner must go through a counseling session which will make them aware of any difficulties which may arise from a reverse mortgage and also point out requirements that must be met before a homeowner can successfully obtain a reverse home loan. This is beneficial in that homeowners have been able to find alternatives to a reverse mortgage which may help them find financial relief without the risk which sometimes is associated with a reverse mortgage loan.

Some senior homeowners have difficulty meeting mortgage payments, medical costs, or other expenses and, as a result, use a reverse mortgage as a way to find solutions to these problems. There have been, as an example, senior citizens who use a reverse mortgage loan to pay off the remaining balance of their mortgage obligation, thus eliminating their monthly mortgage payments.

However, a reverse mortgage often will require that, when a homeowner passes away, the home be sold in order to repay the debt, which would obviously make the passing of a home to heirs impossible, in many cases. There are, obviously, homeowners who may not suffer by having to forgo leaving their home to their children or other heirs, but this is one factor which is often pointed out to homeowners who are attempting to obtain a reverse mortgage.

Also, since one of the alternatives to a reverse mortgage is relocating to a more affordable living arrangement, which would require the sale of a home, many ask why a reverse mortgage would not simply be used if a homeowner will be unable to pass their home on any way.

Downsizing to a more affordable home can bring in money from the sale of a home, yet the difference is that a homeowner would not be indebted for the reverse mortgage as a result. Money gained from the sale of a home can be helpful for senior homeowners later in life, but a reverse mortgage could cause difficulties if a homeowner has to relocate or fails to pay their property taxes.

On the other hand, reverse mortgages have been very beneficial for certain homeowners and, in most cases, have given these individuals peace of mind when it comes to their finances. While there are drawbacks, homeowners who are considering a reverse mortgage are often advised to heavily research any implications a reverse mortgage will have on their financial situation and possible problems which may arise in the future before they proceed with this type of home loan.

Again, more seniors are turning to this option due to fallout from economic troubles which have been experienced over the past months, but financial advisers still want these individuals to be sure that a reverse mortgage will be best for their situation before they proceed.

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Several big changes are coming to the Federal Housing Administration’s reverse mortgage program.

Starting on Monday, the program will introduce a reverse mortgage product that will virtually eliminate one of the biggest upfront fees that borrowers are required to pay. A mouthful, the product is known as the Home Equity Conversion Mortgage Saver, or the HECM (pronounced HECK-um) Saver. At the same time, the F.H.A.’s program will also make changes to its standard reverse mortgage, which will significantly increase certain costs, though it may make more money available for some borrowers.

I outlined the changes in detail — and there are many details — in an article I wrote for Saturday’s paper. But because of space constraints, I had to cut out an example that compared the two reverse mortgage products — the HECM Saver, and the standard version — side by side.

So here it is:

If a 65-year-old borrower with a home valued at $400,000 were to apply for a standard reverse mortgage with a fixed rate of 5.06 percent, he would be eligible for about $255,000. But he would also owe an upfront mortgage premium of $8,000, and roughly $3,600 in other closing costs, which means he would ultimately receive a lump sum of about $243,000, according to ReverseVision, a reverse mortgage software company.

This assumes that the lender waived the origination fee and a servicing fee (lenders can charge an origination fee of 2 percent of the first $200,000 of your home’s value, plus an additional 1 percent for amounts over that, though the total is limited to $6,000). The continuing mortgage premium and interest would be tacked onto the loan balance each month.

If the same homeowner applied for a Saver reverse mortgage, he would be eligible to receive $212,800. But after deducting a $40 upfront mortgage premium, and $3,600 in closing costs, he would get about $209,000. This calculation also excludes any servicing or origination fees, but it’s unclear if lenders will waive them as they have with the standard reverse mortgages.

The above situations assume that borrowers take the money in a lump sum. But they can also choose to receive it in installments or a line of credit, which allows you to withdraw the money when you need it, like a home equity credit line. Right now, a reverse mortgage with an adjustable rate would be about 2.66 percent, according to ReverseVision, though the rate could rise or drop in the future.

Fixed-interest rates are only available on lump sum products, which means borrowers must withdraw all the equity they are eligible for right away and interest begins immediately accruing on the entire balance. For that reason, it may make sense for borrowers who have smaller needs to get a reverse mortgage with an adjustable rate.

“If they don’t need all of the money, they should seriously consider the line of credit,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, adding that the Saver reverse mortgage may become a more direct competitor of the home equity line of credit.

So readers, what do you think? Do you think the new Saver reverse mortgage makes the product more attractive?

Found here.

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