Here's a potential new retirement planning option that could be worth considering.
John K. Lunde, president of Reverse Market Insight Inc., says the reverse mortgage business was off 40 percent in the first half of the year compared to the same period in 2009, but he thinks sales are going to pick up after Oct. 1, when the Federal Housing Administration expects to introduce a new type of reverse mortgage.
The original home equity conversion mortgage, or HECM, is expensive. It not only pays the lender interest out of the remaining equity on the home, it also charges a 2 percent upfront mortgage insurance premium and 0.5 percent annual mortgage insurance premium on the entire reverse mortgage amount. These substantial costs are particularly discouraging to homeowners in retirement who don't have an immediate need for a big lump sum, but who would like to have some money available when they need it.
So, the FHA is now developing the "HECM Lite," which would compete with regular home equity lines of credit. The proposed HECM Lite would have no upfront mortgage insurance payment and a 1.25 percent annual insurance payment on the amount of money actually borrowed. Loan limits would be substantially lower than the original HECM plan.
Under the proposed program, a homeowner 62 and older, could apply for a reverse mortgage and have it approved and available. He would pay no upfront fee, and only pay interest and mortgage insurance on the amount that he actually borrows and doesn't pay back.
The advantage to the government -- and taxpayers who end up guaranteeing these things -- Colin Cushman, director of portfolio analysis at HUD, told the National Reverse Mortgage Lenders Association, is that this plan would help lower the risk to the FHA insurance fund by at least $250 million.
Lunde said that homeowners in retirement who need to pay off an existing mortgage could still apply for the traditional product and benefit despite the high initial fee. But he believes the new product will appeal to a different -- and probably better-heeled -- customer who only wants to pull out a little cash now and then and expects to pay it back when his cash flow is a little better.
That might give a little gas to some people's retirement planning.