Reverse Annuity and Home Equity Conversion Mortgages
What is the difference between reverse-annuity mortgage and reverse mortgages? None both refer to one and the same thing.
A reverse-annuity mortgage is basically an agreement between a homeowner and a lender whereby the homeowner agrees to borrow money against the equity of his home. In exchange, the mortgage lender agrees to lend money and payout the amount at regular intervals to the homeowner, tax-free. Borrowed money is only repaid when the house is sold or refinanced.
Although there are actually three classes of reverse-annuity mortgages, the most popular so far are the Home Equity Conversion Mortgages (HECM), which are backed by the Federal Housing Authority (FHA). Almost all reverse-annuity mortgage borrowers only bother with Home Equity Conversion Mortgages.
The reason for the popularity of Home Equity Conversion Mortgages is that they are relatively less expensive than the other kinds of reverse annuity mortgages. The fact that the federal government backs it also puts a lot of current and potential borrowers at ease.
CALCULATOR: WHY GOV'T. WILL NEVER GO BANKRUPT
The government will never go bankrupt with reverse-annuity mortgages. For one thing, the FHA has set loan limits per county. Typically, the loan amount you can qualify for will not reach 100% of the FHA's loan limit. For another thing, the FHA also requires borrowers to pay an insurance premium on their reverse annuity mortgage, which is also known as the Mortgage Insurance Premium (MIP).
On the first year, the MIP equals 2% of the home's total value, or the maximum claim amount, whichever is lesser from the two. Beginning on the second year the MIP will equal 0.5% of the reverse mortgage loan balance.
In the event that the sales proceeds of your house are not enough to cover the entire amount owed for your reverse-annuity mortgage (principal plus interest and closing-related fees), the FHA will make a claim on the MIP and repay the lender. The MIP also benefits the borrower – even if the bank managing your home equity conversion mortgage goes bankrupt, the government will step in so you can still access your money.
When added through a human calculator called commonsense, all the above mentioned facts indicate that HECM mortgages are a good deal for homeowner seniors who are at least 62 years old.
CALCULATOR: THE CLOSING FEES
Like any other mortgage program, a reverse mortgage loan is also subject to closing costs. Pull out your calculator to check how much you're going to actually spend on them.
- Origination Fee: Equal up to 2% of the FHA's loan limit for the originating county of the reverse annuity mortgage loan.
- Mortgage Insurance Premium (MIP): First year - equal up to 2% of the value of the home or the maximum insurance amount. Succeeding years – equal up to 0.5% of the loan's balance.
- Appraisal Fee for appraising the value of your home: Usually costs from $300 to $400.
- Service Fee Set-Aside: Typically thousands dollars. This fee is used to pay your loan provider for the cost of servicing your account.
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