HECMs Were Once Equal

A few months ago, the Home Equity Conversion Mortgage (HECM) was a complex, but still plain-vanilla type of reverse mortgage. A HECM was pretty much the same no matter who the lender might be. Today, as reverse mortgage popularity (and lender competition) has exploded, HECMs have evolved into a multi-headed hydra with confusing new features and and an even more confusing array of copyrighted “private label” names.

We thought it would be useful for seniors trying to wade through this marketing jungle to be aware of the key traits that set one type of HECM apart from another.

Is It Really a HECM?

The rising popularity of reverse mortgages hasn’t been limited to HECM’s. Other, non-FHA reverse mortgages have multiplied in recent months as well with tradenames that seem designed to confuse: “CashKeeper”, “Simple Zero Cash Account”, “Generation Plan”, “Independence Plan”, etc., etc. Many of these products are targeted at the “jumbo” housing market - homes with values over $450,000. These loans are not FHA-insured, nor are they restricted in size by FHA 203b loan limits. For owners of high value homes, jumbo products can provide benefits not available through the HECM reverse mortgage program.

But for the average senior homeowner in most parts of the country, a HECM reverse mortgage is usually the best avenue to take. So, if this describes you, 50% or more of the marketing confusion can be eliminated by simply asking the question “Is it an FHA-insured reverse mortgage?” and focusing only on products that meet this test.

Is It a Variable Rate or Fixed Rate HECM?

Until very recently, all HECM reverse mortgages were variable rate loans with interest rates that changed monthly or annually, depending on the borrowers preference. In March 2007 BNY Mortgage unveiled a fixed rate HECM that allows borrowers to “lock-in” an interest rate for the life of the loan. You may come across this product under different private label names such as “New Generation HECM” or “Fixed4Life”. And, if past experience is a guide, it is likely competing products will emerge from other lenders very quickly.

There are many sides to the fixed vs variable rate decision that we will discuss in a future article. The volume of fixed rate HECMs is presently quite small, but is certain to grow. It may be worth your while to look into one of the fixed rate options, but, for now, if you are following the crowd, focus on sorting out the confusing menu of variable rate HECM products.

What’s the HECM Margin?

The primary feature that distinguishes variable-rate HECM loans from one another is the interest rate margin. For several years, the most popular type of HECM loan carried a standard 1.50% margin over the one-year US Treasury Rate. This margin was determined by investors who purchased HECM mortgages, particularly Fannie Mae, the quasi-government agency who for many years was the sole investor in HECM reverse mortgages.

In late 2006, BNY Mortgage introduced the HECM 100, which carried a margin of only 1.00%. For borrowers, the lower margin translated into lower loan costs and more upfront cash. The HECM 100 quickly became the new reverse mortgage standard and other lenders introduced similar products to compete.

But higher margin HECMs haven’t gone away just yet. Lenders continue to offer “HECM 150″, “HECM 125″ and even HECMs with margins that “float” from month to month. In theory, this offers the consumer more choices. But, in almost all cases the 1.00 margin HECM products will be the best choice.

Bottomline: New product introductions and private label naming have helped make the reverse mortgage market more confusing than ever. For mainstream borrowers with average-priced homes, a lot of the confusion can be cut through by simply focusing on the 1.00% margin HECM loans.

Social tagging: Reverse Mortgage Products

A Few More Related Articles of Interest:

RAM - Reverse Annuity Mortgage

HECM Mortgage Borrower: Choice May Be Harmful to Your Financial Health

2. How long do I expect to stay in my home?

HECM 100 vs HECM +100

Have a Reverse Mortgage Professional Contact me please!