Good for some people, not so good for others, the changes to reverse mortgages are already in effect. Insurance costs and a reduction in how much can be borrowed, are just two things that are now different.
Here’s a new twist for those considering a reverse mortgage: according to a recent article in Kiplinger, “New Rules for Reverse Mortgages,” upfront mortgage insurance premiums are now set at a flat 2%. That’s for every reverse mortgage, across the board.
This change means that some applicants will pay more, and others will save. If you qualify to take up to 60% of the eligible loan amount in the first year with the remainder available the following year, your upfront cost will increase 1.5% from the previous 0.5%. For those who qualify to take more than 60% in the first year (usually in cases where an outstanding mortgage must be paid off), the upfront cost drops by half a point, from 2.5%.
In addition, the ongoing insurance costs will decrease for all borrowers. The annual premium will drop from 1.25% to 0.5%, which over time, could have a significant impact. The lower ongoing cost may offset much or all the higher upfront cost.
The calculation for maximum loan proceeds is also being adjusted: the adjustments will impact most new borrowers and will cut potential proceeds by 10% to 12%. The new rules drop the percentage of the home value that’s available to borrowers at most ages and at most interest rates. The older you are and the lower the interest rate, the more proceeds you get. However, most will now qualify for less than before the changes.
These changes, which went into effect on October 2, are the latest government effort to secure the federal Home Equity Conversion Mortgage program and alleviate worries about the health of its insurance fund.
Most reverse mortgages are federally backed HECMs, and the government will pay for any gap, if the house sells for less than the loan’s balance.
The new rules present some serious challenges to seniors because of increasing costs and a decrease in the amount that can be borrowed. In addition, seniors who once used reverse mortgages as a kind of mortgage-funded line of credit, known as a “standby strategy,” will probably not be able to afford to do so because of increased upfront costs. Since you don’t pay the annual premium on the untapped line of credit, only on any balance that is accrued, the savings may be lessened. Before you can apply for a reverse mortgage, seniors must also set up and complete a government-required counseling session.
Reference: Kiplinger (September 11, 2017) “New Rules for Reverse Mortgages”