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Older homeowners who have spent years building up equity may be tempted to cash out through a reverse mortgage. But high fees can make these loans pricey.

A new government program reduces some of the expenses. In October, the Federal Housing Administration, the unit of the Department of Housing and Urban Development that runs the reverse mortgage program known as Home Equity Conversion Mortgage, or HECM, introduced the Home Equity Conversion Mortgage Saver, or HECM Saver.

HECM (pronounced HECK-um) Saver trims the upfront insurance premium due at closing to 0.01 percent of a property’s value, from 2 percent. But the amount that can be borrowed is also reduced, by 10 to 18 percent, compared with the standard HECM loan program.

Still, Stanley Gil, a reverse mortgage consultant in Garden City, N.Y., said, “I think we’re going to see a lot of people using it.” The loan “is really going to help people who need some extra cash and have built up equity in their home,” he added.

And AARP says the Saver loan would work well for those homeowners who did not need to borrow the maximum allowed — which is $625,500, based on a property’s value and the interest rate of the reverse mortgage, among other things. HUD provides calculatorsto help determine how much can be borrowed, and AARP offers advice on its Web site.

Reverse mortgages essentially release the equity in a property as cash that can be used for expenses like health care or home renovations, while at the same time paying off whatever remains on the mortgage.

The loans leave homeowners with no monthly mortgage payments; they become due, with interest and other fees, when the owners die, move, or sell the property — or if they fail to maintain the property or keep up with property taxes and insurance.

The leveraged property must remain a primary residence, though, and only single-family homes qualify — as well as buildings with one to four units, provided at least one of the units is occupied by the borrower. Among the other restrictions is age. Anyone who is an owner, and is listed on the title to the property, must be at least 62.

Reverse mortgages boomed in recent years but then acquired a bad reputation, in part because of their costs. Origination fees for the loans are now capped at $6,000, while other closing costs are about equal to those for a conventional mortgage. Until HECM Saver, the upfront insurance premium was a major additional cost that could run as high as $12,510.

Fixed-rate reverse mortgages typically run 0.25 to 1.25 points above conventional mortgages; they now generally range from 4.99 percent to 5.25 percent, depending on the loan size, compared with an average 4.91 percent for a 30-year fixed-rate conventional mortgage.

The tax-free payout in a reverse mortgage, which can also carry an adjustable rate, can be taken in a lump sum or parceled out monthly, providing a steady income stream. The loans don’t require a minimum credit score or have income limits. But borrowers cannot be underwater, or owe more on a current mortgage than the property is worth.

The F.H.A.-backed version of the reverse mortgage — the most popular — is still unavailable to co-op owners. Lemar C. Wooley, an agency spokesman, said the F.H.A. was “currently evaluating the HECM program for co-ops to determine if it would meet our financial requirements.”

Consumers Union, the independent nonprofit testing organization that publishes Consumer Reports, says cash-needy homeowners should consider a home-equity loanbefore a reverse mortgage, because of the high closing costs and insurance fees.

Reverse mortgages may not be suitable for homeowners who want to leave their property to heirs, mortgage experts say; often the loan must be paid off through the sale of a home, although the note may be refinanced.

SOME affluent homeowners have been walking away from a second home or investmentproperty that is worth less than what is owed on the mortgage, even though they can still afford to make the payments.

But dumping that beach condo or country cottage, or even a home bought for an adult child — a practice known in the industry as a “strategic default” — is not the same as discarding a poorly performing stock or bond. Among the lingering effects is wrecked credit that can prevent the homeowner from getting another loan of any kind for 7 to 10 years.

In July, a study by researchers from the European University Institute, Northwestern University and the University of Chicago concluded that the strategic default trend was “large and rising” among homeowners with an equity shortfall of $100,000. As of last March, it said, strategic defaults accounted for 35.6 percent of all foreclosures, compared with 23.6 percent a year earlier.

“I’m increasingly seeing people who are middle class or higher on the pay scale coming to the conclusion that ‘I may be able to carry it, but should I?,’ ” said David Shaev, a bankruptcy lawyer in New York who assists homeowners in distress.

“But the question is, can the bank come after you, and if so, what is your position? What is your liability?”

The answer depends largely on where the property is.

In “recourse” states, a lender can come after you, and usually other assets like a primary residence, for the full mortgage amount. In “nonrecourse” states, a lender agrees to accept whatever the property fetches at a short sale, foreclosure sale, or a deed-in-lieu, in which the property is taken back but not formally foreclosed on, and generally can’t sue for the full loan amount. Connecticut and Arizona are among the nonrecourse states, while Florida, Colorado, Maine, New Jersey and Hawaii are recourse states.

There is a third category of state, called “single-action” or “one-action,” which allows the lender either to foreclose on the owner or file a civil lawsuit for the full loan amount. New York, California and Idaho are in that category.

Even in a nonrecourse state, however, those homeowners who opt for a strategic default on a previously refinanced property may not be protected from lenders, because the mortgage in such a case was not accorded for a first purchase, said Philip Faranda, a mortgage broker for J. Philip Real Estate, in Briarcliff Manor, N.Y.

When home-equity loans are involved, he added, it gets more complicated. In nonrecourse states like Florida and Connecticut, the lender cannot sue to collect anyhome-equity loan taken out on the property. But in nonrecourse states like Arizona and California, the lender can still sue for repayment of a second mortgage or line of credit.

Filing Chapter 13 bankruptcy protection, in which the homeowner arranges to pay off debts at lowered amounts over a maximum of five years, is typically the only way to avoid being on the hook for the second loan, mortgage experts say. Affluent homeowners who strategically default on a second home often don’t qualify for Chapter 7 bankruptcy, which leads to liquidation but limits eligibility to those earning no more than state median income levels.

Though not illegal, strategic defaults are controversial, because they are viewed in some circles as unethical. The practice is common among property developers.

For homeowners under water, experts say, it can make economic sense. “It’s a business cash-flow decision,” Mr. Faranda said, “but the risk is that you’re rolling dice with your future credit.”

A foreclosure from default stays on a homeowner’s credit report for 7 years, while filing for bankruptcy stays on the report for 7 to 10 years, he said. A default can lower a credit score by 85 to 160 points, according to FICO, the company that created the scoring method.

This article has been revised to reflect the following correction:

Correction: December 19, 2010

The Mortgages column on Dec. 5, about defaulting on second homes, described incorrectly the ability of lenders to sue homeowners in Florida for the amount owed on a foreclosed property. Florida is a “recourse” state, and lenders may sue homeowners there. It is not a “nonrecourse” state, where lenders typically are required to accept whatever a property sells for in a foreclosure sale.

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With demand rising for reverse mortgages, senior citizens are particularly at risk of being misled and should be protected by greater government oversight of the industry, according to a report by Consumers Union and two California advocacy groups.

In a struggling economy, older homeowners are turning to reverse mortgages as a way to pull money out of their homes, with the loan not coming due until the borrower dies. But the loans can come with hefty charges, including origination fees, closing costs and compounding interest on loan principal.

“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, senior staff attorney for Consumers Union.

“Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income,” she said.

The report was released Tuesday by Consumers Union, the nonprofit publisher of Consumer Reports magazine, along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley. It warned that seniors taking out reverse mortgages risk losing their homes while they’re still alive.

The groups called for strong oversight from the new federal Consumer Financial Protection Bureau, which is being launched by Obama administration appointee Elizabeth Warren as part of financial reform legislation passed this year.

The report lists concerns including misleading marketing claims by lenders; attempts to sell borrowers other products at the same time, such as long-term-care insurance or annuities, and an increasing number of borrowers defaulting on reverse mortgages, triggering foreclosures.

Consumers Union offers tips about reverse mortgages on its website, http://www.consumers.union.org.

The site’s offerings include information about applying for government benefits for seniors, getting advice from local Housing and Urban Development counselors and seeking a so-called private reverse mortgage — a loan from a family member using the senior’s home equity as collateral.

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Senior homeowners are having difficulty in their financial lives due to a variety of reasons and, as a result, there are indications that more homeowners are turning to reverse mortgage loans as a way to access capital from their home’s equity. FHA reverse mortgage loans have been helpful to certain homeowners, but some financial advisers are cautioning homeowners before they proceed with this type of mortgage and suggest that senior homeowners seek out other options first.

Typically, when a reverse mortgage is concerned, especially one offered by the Federal Housing Administration, a homeowner must go through a counseling session which will make them aware of any difficulties which may arise from a reverse mortgage and also point out requirements that must be met before a homeowner can successfully obtain a reverse home loan. This is beneficial in that homeowners have been able to find alternatives to a reverse mortgage which may help them find financial relief without the risk which sometimes is associated with a reverse mortgage loan.

Some senior homeowners have difficulty meeting mortgage payments, medical costs, or other expenses and, as a result, use a reverse mortgage as a way to find solutions to these problems. There have been, as an example, senior citizens who use a reverse mortgage loan to pay off the remaining balance of their mortgage obligation, thus eliminating their monthly mortgage payments.

However, a reverse mortgage often will require that, when a homeowner passes away, the home be sold in order to repay the debt, which would obviously make the passing of a home to heirs impossible, in many cases. There are, obviously, homeowners who may not suffer by having to forgo leaving their home to their children or other heirs, but this is one factor which is often pointed out to homeowners who are attempting to obtain a reverse mortgage.

Also, since one of the alternatives to a reverse mortgage is relocating to a more affordable living arrangement, which would require the sale of a home, many ask why a reverse mortgage would not simply be used if a homeowner will be unable to pass their home on any way.

Downsizing to a more affordable home can bring in money from the sale of a home, yet the difference is that a homeowner would not be indebted for the reverse mortgage as a result. Money gained from the sale of a home can be helpful for senior homeowners later in life, but a reverse mortgage could cause difficulties if a homeowner has to relocate or fails to pay their property taxes.

On the other hand, reverse mortgages have been very beneficial for certain homeowners and, in most cases, have given these individuals peace of mind when it comes to their finances. While there are drawbacks, homeowners who are considering a reverse mortgage are often advised to heavily research any implications a reverse mortgage will have on their financial situation and possible problems which may arise in the future before they proceed with this type of home loan.

Again, more seniors are turning to this option due to fallout from economic troubles which have been experienced over the past months, but financial advisers still want these individuals to be sure that a reverse mortgage will be best for their situation before they proceed.

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Several big changes are coming to the Federal Housing Administration’s reverse mortgage program.

Starting on Monday, the program will introduce a reverse mortgage product that will virtually eliminate one of the biggest upfront fees that borrowers are required to pay. A mouthful, the product is known as the Home Equity Conversion Mortgage Saver, or the HECM (pronounced HECK-um) Saver. At the same time, the F.H.A.’s program will also make changes to its standard reverse mortgage, which will significantly increase certain costs, though it may make more money available for some borrowers.

I outlined the changes in detail — and there are many details — in an article I wrote for Saturday’s paper. But because of space constraints, I had to cut out an example that compared the two reverse mortgage products — the HECM Saver, and the standard version — side by side.

So here it is:

If a 65-year-old borrower with a home valued at $400,000 were to apply for a standard reverse mortgage with a fixed rate of 5.06 percent, he would be eligible for about $255,000. But he would also owe an upfront mortgage premium of $8,000, and roughly $3,600 in other closing costs, which means he would ultimately receive a lump sum of about $243,000, according to ReverseVision, a reverse mortgage software company.

This assumes that the lender waived the origination fee and a servicing fee (lenders can charge an origination fee of 2 percent of the first $200,000 of your home’s value, plus an additional 1 percent for amounts over that, though the total is limited to $6,000). The continuing mortgage premium and interest would be tacked onto the loan balance each month.

If the same homeowner applied for a Saver reverse mortgage, he would be eligible to receive $212,800. But after deducting a $40 upfront mortgage premium, and $3,600 in closing costs, he would get about $209,000. This calculation also excludes any servicing or origination fees, but it’s unclear if lenders will waive them as they have with the standard reverse mortgages.

The above situations assume that borrowers take the money in a lump sum. But they can also choose to receive it in installments or a line of credit, which allows you to withdraw the money when you need it, like a home equity credit line. Right now, a reverse mortgage with an adjustable rate would be about 2.66 percent, according to ReverseVision, though the rate could rise or drop in the future.

Fixed-interest rates are only available on lump sum products, which means borrowers must withdraw all the equity they are eligible for right away and interest begins immediately accruing on the entire balance. For that reason, it may make sense for borrowers who have smaller needs to get a reverse mortgage with an adjustable rate.

“If they don’t need all of the money, they should seriously consider the line of credit,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, adding that the Saver reverse mortgage may become a more direct competitor of the home equity line of credit.

So readers, what do you think? Do you think the new Saver reverse mortgage makes the product more attractive?

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Reverse mortgage applications saw an increase in August of slightly more than 8 percent.  This according to a report from the Federal Housing Administration (FHA).  Although this represents a decline of nearly 4 percent since the same period last year, the latest reading is the highest measured since last September.

However, an increase in the rate of applications is not unheard of prior to the ending of the fiscal year for the FHA.  Additionally, another surge is expected during the fall as borrowers seek to maximize the amount of their loans prior to the lowering of principal limit factors coming from the Department of Housing and Urban Development (HUD).

With respect to the reduction in principal limits, experts believe that reverse mortgage applications are likely to begin to stall for the remainder of this year and for much of 2011.  At this point, little is known about whether or not HUD plans to make any changes to this policy in the immediate future.

Other data emerging from the FHA showed slightly more than 200,000 applications were processed during August.  Of these, more than half were comprised of mortgaged refinances with the balance made up of new purchase transactions and reverse mortgages. In terms of breakdown, the agency saw approximately 105,000 refinance applications, 87,000 new purchase applications and nearly 10,000 reverse mortgage applications.

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The Federal Housing administration (FHA) has announced a new and modified version of its Home Equity Conversion Mortgage (HECM) product today. This new product will allow older home owners to dip into their equity. They will be able to use this to cover their living and health care costs. When they are doing this they will still be allowed to live in their homes and pay no mortgage payments that come with normal mortgage and equity loans.

The HECM Saver is a second reverse mortgage option that will allow lowering upfront loan closing costs. Homeowners with a desire to borrow smaller amounts than the one under HECM saver loan can opt for the HECM Standard loan. The loan option is available for all HECM case numbers that are or will be assigned on October 4, 2010.

“Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them,” said FHA Commissioner David Stevens. “In response, we created HECM Saver which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option.”

The HECM Saver has an upfront premium of .01% of the property’s value. The upfront premium on the HECM Standard option is 2% however. There is a monthly MIP charge of 1.25% annual rate of the outstanding loan balance.

The HECM clients can ask for funds at a lump sum at the loan origination. They can also establish a line of credit if they want or request fixed monthly payments for as long as they will live in their homes. The funds which are given to the borrower will start accruing interest and must be paid only when the borrower dies, leaves the home or sell it. FHA insurance will pay the difference if the laon balance exceeds the home value.

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Q: I am retired. I’ve lived in my current home for 17 years, but want to downsize into a smaller, less expensive home. A friend told me that a reverse mortgage can be used to help me buy a new home. How would that work?

—Pittsburgh

A: A reverse mortgage called the Home Equity Conversion Mortgage can be used to borrow against your current home’s equity to buy or make a down payment on another primary home. How much you can borrow varies, depending on your age, the value of your home and interest rates. You will, of course, have to make up any difference between the proceeds of this mortgage and the sales price and closing costs of the home you want to buy. But if these costs are less than the proceeds, you pocket the difference.

HECMs are insured by the Federal Housing Administration. The loan requires that you pay a mortgage insurance premium that’s the lesser of 2% of your home’s value or the HECM mortgage limit for your area, as well as a monthly fee that’s .5% of your mortgage balance. (A new option called the “HECM Saver” introduced this week lowers the upfront fee but raises the monthly fee for borrowers who are willing to receive 10% to 18% less than they would under a standard HECM.) But that fee protects your heirs, as I’ll explain later.

HECMs have an advantage over many other types of purchase loans in that borrowers at all income levels qualify. But there are some caveats: You must be at least 62 years old; occupy your current home as a principal residence and either own a home free-and-clear or have only a small remaining mortgage balance. You can’t be delinquent on any federal loan, and you must agree to speak with a HECM counselor.

If you meet these qualifications, your house will be appraised by the lender. The total amount you’ll be able to borrow will be limited to the lower of its appraised value, or the program’s mortgage limit of $625,500.

You’ll then pay an origination fee that varies depending on the appraised value of the home, but won’t exceed $6,000, plus customary closing costs, which includes the cost of the appraisal. These costs can be rolled into your loan (although this will reduce the amount of the HECM proceeds available to you), or they can be added to your cash down payment.

Then you sell your old home and move into your new one. You will not have to make any more house payments on your new home as long as it remains your primary residence. When you eventually move or die, the home is sold and the lender collects the principal and interest you owe. If the house sells for more than is owed, your heirs get the difference. However, if the home sells for less than the amount owed, the mortgage insurance premium you paid guarantees that the FHA will pay the difference, so your heirs aren’t stuck with a big bill.

Correction & Amplification:

The HECM’s mortgage limit is $625,500. An earlier version of this column incorrectly said it was $625,000.

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The Federal Housing Administration (FHA) has announced a new modified version of its Home Equity Conversion Mortgage (HECM) product. The HECM loan is a reverse mortgage-insured by the federal government. It allows older home owners to tap into their equity to cover living expenses and healthcare costs, while continuing to live in their home without having to make the mortgage payments that are required with a traditional mortgage or equity loan.

FHA designed HECM Saver as a second reverse mortgage option for the purpose of lowering upfront closing costs, for homeowners who want to borrow a smaller amount than what would be available with a HECM Standard loan. This option will be available for all HECM case numbers assigned on or after Oct. 4, 2010.

“Despite the popularity of our HECM loan product, we have noted concerns that some senior citizens find that our fees are too high for them,” said FHA Commissioner David H. Stevens. “In response, we created HECM Saver which will provide seniors with a reverse mortgage option that significantly lowers costs by almost eliminating the upfront Mortgage Insurance Premium (MIP) that is required under the standard HECM option.”

HECM Saver will have an upfront premium of only 0.01 percent of the property’s value. Under the HECM Standard option, the upfront premium will remain at two percent. The MIP for both HECM Saver and HECM Standard will be charged monthly at an annual rate of 1.25 percent of the outstanding loan balance.

The reduction in upfront fees will be accomplished while substantially lowering the risk to the FHA insurance fund because the principal limit or amount of money available to a borrower under the HECM Saver program will be reduced. Borrowers will receive approximately 10 to 18 percent less under the HECM Saver option, than they would receive under HECM Standard.

HECM borrowers may opt to receive funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments that are disbursed for as long as they continue to live in the home. Funds are advanced to the borrower and interest accrues, but the outstanding amount does not have to be repaid until the borrower dies, leaves the home or sells the property. At that time, if the balance due on the loan exceeds the value of the home, FHA insurance pays the difference.

For more information on FHA HECM Saver option, read FHA’s Mortgagee Letter 2010-34.

For more information, visit www.hud.gov.

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Life is taking a big bite out of the “Sandwich Generation.” If you’re a boomer, it’s more likely than ever that you’re helping with the care of both your aging parents and your adult children. You’re the “meat” in the middle of the sandwich — and the center is getting thin.

A new survey done by Zogby International for Generation Mortgage (a reverse mortgage company) shows that baby boomers are among the hardest hit by this recession. Nearly half of those polled had either lost a job or taken a cut in pay or benefits in the past two years. As a result, 17 percent had been unable to make a mortgage or rent payment on time.

Yet, if you’re the boomer in your family, you’re the one everyone looks to for help. Your adult kids, graduating from college with huge student loan debt and few job prospects, are moving back in. They may collide with a grandparent who reluctantly moved into your home when their money ran out, or they needed some care and assistance.

Finally, the boomer generation has found a use for that huge house on which they overspent a decade ago. Now if they can only keep up with the mortgage!

This is a tough position for American families that planned for a different lifestyle. But it is not without precedent. A hundred years ago it was common for three generations to live under one roof — an old lifestyle that may be forced into a comeback.

But 100 years ago, Americans did not have to plan for a 25-year period of retirement. People worked harder at physical labor, wore out faster, and didn’t have modern medicine (with all its costs) to help them live longer.

So the question for the Sandwich Generation is how to manage this squeeze. It’s no longer a cute term designed to make you smile. Now the recession is taking a big bite.

ADVICE FOR THE SANDWICH

Face reality

The hardest advice to take is the most basic. You need to face up to the reality of your position — and the fact that it might not be temporary. That is, you might be helping your parents for the rest of their lives, and it might be a while until your adult kids find a job. Change your time horizon.

Make a plan — and share it

It does no good to pretend that things are really the same, for anyone in this sandwich. A family discussion is required — but first you need to make your own financial plan, since you’re presumably the ones with the money and the assets, which is why everyone thinks you can fix things.

Create priorities

The Zogby poll shows that 73 percent of the Sandwich Generation have cut back on entertainment and eating out, while 43 percent have decreased overall spending on basic groceries. For sure, your everyday lifestyle will change when you take on the responsibility of another generation. But you must take an honest look at whose needs come first.

Top priority — yourself

Keeping your own ship afloat is the top priority, without which and despite all your good intentions, you can’t help anyone else. So you need to make a household budget allowing everyone to share the burden. Adult kids can and should pay some room and board. Grandma will certainly share her Social Security check. It’s like the airlines’ announcement: Put on your face mask first, before helping others.

Aging parents

Be sure to check into available programs in your community that can help your elderly parents — if not financially, at least by giving them some resources to spend time with others of their generation in an elder day care program. You’re not doing Grandpa any favors by letting him go to his room and watch TV.

Your children

Sorry, but your priorities have turned upside down — and your kids are not likely to understand. You’ve spent your life putting them first, making sure they got to college. Now they have student loans and no jobs. (Read this coming Thursday’s column for some solutions to that problem.) But this is their problem to solve — and the most you can offer is a roof over their head until they figure out how to move out. Never dig into your own retirement funds, or take out a mortgage loan, to repay your kids’ student loans.

Have a family discussion

There’s no reason for you to be the only one worried about your finances. After you’ve sorted out your priorities and taken a realistic look at the available money, sit down at the kitchen table and share your worries — and your hopes. With everyone aware of the reality, you might be surprised at the solutions they contribute. We’ve become so insular that these tough times might teach us the value of inter-generational living.

It’s tough running a three-generation household, especially when you’re financially squeezed. Community agencies report that the number of people using food pantries has more than doubled. Older people must choose between food and medicines. Swallow your pride and ask for help.

And if you’re one of those fortunate Americans who have job security, have parents who saved enough, and kids who got the good jobs, reach out to someone else in your family or neighborhood who is on the edge. You won’t have to look far if you open your eyes.

And even showing your concern in a small way will be a big help — dropping off a basket of groceries, offering to drive a senior to a doctor’s appointment, or giving a low-paying entry job at your company to a neighbor’s struggling graduate.

There is no doubt that we are in the toughest times since the Great Depression. But our grandparents and great-grandparents made it through. And we will too. That’s the Savage Truth.

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