What Product Options Do I Have To Chose From?
The Lending Limit is set by HUD and is currently $625,500.
In This Article We Will Discuss the Question…
What PRODUCTS OPTIONS do I have to choose from?
A heated debate has been going on whether the HECM is two products- a fixed rate product and an adjustable rate (ARM) product, or whether the HECM is one product having two rate options, each having separate payout guidelines.
HECM-Fixed Versus HECM-ARM Payment Option
The HECM is well-liked due to its rate stability that is fixed. There is no likelihood of rising interest rates. However, the presently low-interest rates and payout options on the ARMs are attractive to others.
FIXED RATE (Single Disbursement Lump Sum Payment)Payment Option
Fixed rate HECM are new products, and they are close-ended loans. “Close-End” implies that the borrower takes all their proceeds when the loan closes. In other words, these loans are not available for future draws. The review of the loan program in September 2013 states that the homeowner is not under an obligation to draw all of the funds for which that they are qualified. Meanwhile, the changes specify that the MAXIMUM amount the borrower can get at closing (Disbursement Limit) will be the greater of the following two amounts:
Option 1: 60% of the borrower’s Principal Limit, or
Option 2: Their Fixed Obligations plus 10% (Cash Allowance)
As a single disbursement loan, the borrower is NOT qualified for future draws. It is only at the time of closing that the borrower can receive any funds he or she intends. Hence, this fixed rate option is referred to as a “Single Disbursement Lump Sum Payment” option.
Here’s an Illustration
Robert owns a home that is valued at $190,000. Due to his age and fixed interest rate, the principal limit that he qualifies for is $100,000 only.
Option 1: Should Robert have little (or no) mortgage liens to settle, he cannot receive more than $60,000 Single Disbursement Lump Sum Payment.
Option 2: Meanwhile, if Robert has to pay off his mandatory obligations of $100,000, he could use his Single Disbursement Lump Sum Payment of up to $100,000. This will also be the start of the loan balance. Because this loan is close-ended, Robert cannot make future draws but can settle his balance at any time.
Did You know
On the Fixed Rate:
A Single Lump Sum Amount- Cash is sent at the time the loan funds for the entire amount of money the borrower qualifies to receive.
The HECM-ARM is completely different. It is “Open-Ended” and allows for several payout options which are flexible. In the long run, the users can get much more from their HECM, and enjoy several financial planning benefits to be discussed later.
First, let us explain what “Open-End” means as regards a HECM. Open-End credits permit the borrower to take future draws and make payments that are aimed at increasing the future borrowing capacity. Therefore, making payment for an adjustable rate HECM loan will decrease the loan balance and enhance the line of credit (LOC) of the borrower for future use.
The Initial Disbursement Limits function differently for the HECM-ARM. Rather than limiting the draws to closing day, the ARMs permits the borrower to use the greater of the following two amounts in the first year:
Option 1: 60% of the borrower’s Principal Limit, or
Option 2: Their Mandatory Obligations plus 10% (cash allowance).
The benefit if ARM over the fixed rate product is that borrowers have access to the balance of their principal limit (plus growth) immediately after the first year that the Initial Disbursement Period ends.
HERE’S an Illustration
Donna owns a home valued at $200,000. Due to her age and expected interest rate, she is eligible for a $120,000 principal limit.
Option 1: If Donna has little or no mortgage liens to settle, she has up to 60% threshold ($72,000) she can use in the first year; after which the remaining principal limit ($48,000 including growth) becomes accessible.
Option 2: Meanwhile, if Donna requires $110,000 to settle her required obligations and $10,000 in cash, she could receive the $120,000 in the first year.
Since it is an open-ended loan, Donna can pay part of her balance anytime. This could enhance her line of credit, and give her the benefit of taking future draws.
The most crucial factor to consider when choosing between a fixed rate and adjustable rate option is NOT the rate itself. It is the PAYOUT OPTION that best meets the homeowner’s needs.
The payout options that the homeowner has will be determined by if the HECM is a fixed rate or adjustable rate product.
Proprietary loan products are not insured by the government but are privately funded. Some homeowners in some markets may consider these loan programs beneficial.
24 CFR § 206.17
A mortgage shall determine either fixed or adjustable interest rates according to § 206.21.
24 CFR § 206.21. INTEREST RATE
Fixed Interest Rate: Both the mortgagor and mortgagee must agree on it.
Adjustable Interest Rate: The mortgagor and mortgagee jointly agree on the initial interest rate. The interest rate, based on whichever the mortgagor selected, shall be adjusted in one of the two ways. Any time an interest rate is adjusted, the new interest rate applies to the whole mortgage balance.
The distinction between the initial interest rate and the index figure applicable when the firm commitment is issued shall be the margin used do decide interest rate adjustments.
Mortgagee Letter 2013-27 SINGLE DISBURSEMENT LUMP SUM PAYMENT
The maximum disbursement allowable at loan closing is either:
The greater of (60%) of the Principal Limit; or
The sum of Mandatory Obligations plus 10% of the Principal Limit
Note: The amount of funds available to the mortgagor shall be reduced by the addition of Mandatory Obligations, Set-Asides, and other charges. The only time that the Initial Disbursement Limit can be taken is at the loan closing time.