What Are They and What Do You Need to Know
For seniors looking to tap into their home’s equity, there are a few different options available in the marketplace today.
One of those is a Home Equity Conversion Mortgage (HECM) Saver, and another is a Home Equity Line of Credit (HELOC).
The HECM Saver provides many of the same features found in a HELOC—but there are also some differences as well. The HECM Saver generally has fewer qualifications for loan eligibility. Additionally, with the HECM Saver borrowers don’t have to make any repayments on the loan until it becomes due.
What is a HECM Saver?
The HECM Saver program is similar to the HECM Standard in that it’s a Federal Housing Administration (FHA)-insured loan for borrowers aged 62 and over that allows them to access a portion of the equity in their home.
Under the HECM program, borrowers can receive their loan proceeds through monthly term or tenure payments, a lump sum, a line of credit, or some combination of these options.
And with both types of these HECM loans, borrowers are not required to make monthly mortgage payments as long as the borrower lives in the home as their primary residence, keeps up with maintenance, and pays their taxes and insurance.
The HECM Saver differs from the Standard in that it gives borrowers an opportunity to access less of their home equity at a lower cost. While the standard reverse mortgage requires borrowers to pay an initial Mortgage Insurance Premium (MIP) of 2% of the appraised value, the Saver’s initial MIP is just .01%.
For a prospective applicant with a home valued at $200,000, that means paying an initial MIP of $4,000 for a HECM Standard—or just $20 with a Saver.
Even though borrowers will receive a smaller loan based on their home’s value and other determining factors, it can be an attractive option for those looking to access their home equity at a lower cost.
What is a HELOC?
A HELOC loan lets homeowners borrow up to a certain amount of money based on their amount of home equity. They can draw on the amount available to them in varying amounts at times of their choosing during the “draw period.”
In order to qualify for a HELOC, banks require that borrowers meet certain income and credit qualifications to ensure they can repay the loan. Unlike a reverse mortgage, monthly mortgage payments are required in order to stay current on the loan.
Typically, HELOCs have a variable interest rate that is tied to a prime rate.
How do HECM Savers compare to HELOCs?
Both the HECM Saver and a HELOC allow you to borrow money based on the amount of equity in your home.
Unlike a HELOC, the HECM Saver does not have any income requirements that borrowers must meet in order to qualify. This can make or break it for many seniors on fixed incomes who might not be able to meet the requirements for a HELOC, but are eligible for a Saver.
One downside to the HECM Saver might be the mortgage insurance premium (MIP), Although the MIP is a required fee, it also offers certain benefits to the borrower. While the HELOC doesn’t require any similar insurance fees, it’s important to remember that it doesn’t come with the same protections as a result.
If a borrower finds his or her home value has fallen dramatically, the bank has the right to cut off or freeze any remaining funds. If the borrower decides to sell the home and owes more than the home is worth, the bank may require that the borrower make up the difference.
Since HECM Saver borrowers pay for mortgage insurance, they’re given the assurance that the amount owed on the loan can never be more than the value of the home at the time of sale, and that a lender can never revoke access to their home equity as long as the borrower meets the obligations of the loan.
A HECM Saver also provides an additional benefit if borrowers decide to keep their unused home equity in a line of credit. With a HECM Saver, the unused portion of the line of credit grows over time, increasing access to borrowing power; a HELOC does not have any similar feature.
While both products allow borrowers to access the equity in their home, each has different features that might make it a better choice for seniors.