Yesterday in this space we discussed a 'qualified personal residence trust' or QPRT which may be a viable part of a comprehensive estate plan for individuals who would like to transfer their home to a child in the future but would like to take advantage of the current gift tax and housing market conditions. Today I thought we could examine a new twist on an option that has been around for a while as a means of making immediate use of some of your home's equity.

A new type of reverse mortgage, known as a 'Saver,' introduced by the Federal Housing Administration, can reduce some of the drawbacks that had kept many seniors from considering a reverse mortgage. Specifically, for those that qualify for the Saver reverse mortgage the upfront fees are greatly reduced.

As you likely know, a reverse mortgage allows homeowners over 62 years of age to borrow against the equity in their house and receive either a lump sum or monthly payments. Amount borrowed must be repaid when the homeowner dies or is otherwise no longer living in the house.

One drawback of reverse mortgages though had always been that the upfront fees can be quite high. Because the amount due at the end is limited to the value of the home the FHA has traditionally charged a rather high fee in order to cover the cost when the home's value falls short of the amount due. This has generally meant that the FHA collects up to two percent of the value as mortgage insurance. For the Saver loan the FHA has reduced this to just 0.01 percent.

They can do this because a Saver loan is limited to a lower portion of the home's equity. So the loan is smaller and there is less risk that the home's value will be insufficient to cover the loan.

Just like the QPRT mentioned yesterday careful consideration must be given to any consideration of reverse mortgage whether it is the Saver option discussed today or a more traditional reverse mortgage. It is always advisable to have a conversation with a financial professional or attorney experienced in estate planning before making any significant financial decisions.

Source: Wall Street Journal "The Reverse Mortgage Gets a Makeover" Anne Tergesen , January 8, 2011