The Department of Housing and Urban Development (HUD) has recently announced changes to the Home Equity Conversion Mortgage program, also known as the reverse mortgage. Officials stated that the current program is losing money and is no longer viable for the Department without these changes. The changes include a change in the calculation of available proceeds, resulting in a reduction in the principal limit, reducing the amount of money available for a borrower from approximately 52.4% of their home’s value to 41.0% at age 62. This is an approximately 20% reduction in available proceeds, and the size of the reduction increases slightly for older borrower’s (up to age 80).
In addition to this change we see the upfront Mortgage Insurance Premium (MIP) paid to FHA returned to 2% of the amount borrowed. This was traditionally the amount charged but was changed in recent years to a tiered system with borrower’s paying either 0.5% or 2.5% depending on the percentage of their home’s value they borrowed. For many borrower’s this will represent a slight reduction in costs. This change is most likely designed to reduce the number of borrowers taking a line of credit and leaving the available funds in the account to grow. This strategy has been researched extensively and is proving very popular as a financial planning tool, however HUD sees this strategy that benefits the borrower as potentially representing significant long-term liability for the Department.
Finally, we will see a reduction in the annual mortgage insurance premium charged on the balanced owed from 1.25% to 0.5%. This reduction will benefit borrowers that have a need to use their available funds, and a reduction in fees is good for everyone. Unfortunately, this reduction and the change in upfront MIP appears to be directly aimed at increasing the amount borrowed early in the reverse mortgage while decreasing the number of people utilizing the “Standby Line of Credit” option that has become so popular in recent years.
These changes will reduce the amount of money that is available to you if you are considering a reverse mortgage, and they may increase your upfront expenses if you plan to open a line of credit for use when you need it. If you have been thinking about a reverse mortgage, now is the time to take the next step. Reverse mortgage counseling is required for all borrower’s and must be completed and an application signed by October 1st to beat the deadline for this rule change. Contact us today for more information!