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New, cheaper reverse mortgage may be competition for home equity loans

[Oct 9, 2010.]


Competition for home equity loans

The US Department of Housing and Urban Development (HUD) has created a new reverse mortgage product that will compete with traditional home equity loans. While previously reverse mortgages had big upfront costs that made them too expensive for small loan amounts, now seniors looking for a small amount of cash have an alternative to home equity loans. The new reverse mortgage, called HECM Saver, is going to create competition for home equity loans and give seniors a new financing option.

HECM Standard vs. HECM Saver

Home Equity Conversion Mortgages (HECM) are the most popular reverse mortgages. The main difference between the old HECM Standard and the new HECM Saver is in the upfront costs. The HECM Standard requires the borrower to pay 2% of the maximum claim amount (which is often the appraised value of the home). Regardless of how much seniors intend to borrow, they may pay 2% of their appraised value to get a HECM Standard. If the home appraises for $250,000, the upfront fee could be $5,000. For seniors only looking to consolidate debts of about $15,000, it would make no financial sense to pay the $5,000 fee. HECM Saver nearly eliminates that fee. Qualified seniors can borrow the $15,000 they need for only 0.01% of the maximum claim amount, or $25.

HECM Saver vs. home equity loans

Home equity loans are cheap loans compared to reverse mortgage HECM products. But, they have two disadvantages. One, you have to have income and good credit to qualify. Two, you have to make monthly loan payments. Reverse mortgage approvals are based mainly on equity, age, and current interest rates. And there are no monthly loan payments. A reverse mortgage requires no payment until the homeowner vacates the property.

In choosing a home loan, you must balance the total cost of the loan against its effect on your cash flow. Sometimes it is best to get expert advice. Get help and find out which of these loans will work best for you. Talk to a home loan specialist now.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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