In a recent TV program and accompanying article, CBS News recently reported on the virtues of the HECM Saver. While CBS was right to praise this latest addition to the HECM reverse mortgage series of products, it praised it for the wrong reasons. Sadly, its news coverage demonstrated a serious lack of understanding of the HECM Saver.

The Home Equity Conversion Mortgage (HECM) Saver was introduced in late 2010 by the FHA in response to criticisms that the existing product, the HECM Standard, was not economical for most borrowers. With the HECM Saver, the expensive upfront mortgage insurance premium was effectively eliminated (though the annual insurance premium was left in place). To compensate for the increased risk and to minimize the chance of default, the FHA also reduced principal limits for the new product.

According to CBS News, you can now save money on interest when you obtain a reverse mortgage. This is wrong on two accounts. First of all, while it’s true that mortgage rates are at record lows, the FHA has mandated an interest rate floor for fixed-rate reverse mortgages at 5%. Second, the HECM Saver often carries a slightly higher rate of interest (for both fixed and variable rates) than its counterpart, the HECM Standard, undoing some of the savings from a lack of upfront insurance premium.

CBS News’ second mistake was to advise borrowers to “Consider the loan to fill short-term needs.” This was predicated on the assumption that other “fees are waived,” but this is hardly a given. In addition, while the lack of upfront insurance premium means that reverse mortgages are cheaper than before, they still carry significant upfront costs, exceeding 5% of the value of the loan. The only way such costs can be rationalized is if the reverse mortgage remains outstanding for many years. When you factor in the annual insurance premiums, service fees, etc., a reverse mortgage will almost always be more expensive than other types of loans. A Home Equity Line of Credit (HELOC), for example, is probably a better choice for borrowers with short-term needs.

Ultimately, the HECM Saver was created not for the benefit of borrowers with short time horizons, but rather for borrowers with smaller capital needs. Those that don’t require massive loans, but otherwise are well suited for the HECM Standard, would be wise to consider it. For all other borrowers, a reverse mortgage of any kind should continue to be thought of as a last resort only.

Have Feedback on This Article?