On October 1, HUD will change the rules on the Home Equity Conversion Mortgage (HECM) Program.
Senior homeowners age 62 and over have a unique, low-risk way to borrow money known as a reverse mortgage. It allows seniors to access valuable equity they have built up in a primary residence. There are no monthly payments with a reverse mortgage, so it’s a good way to borrow without risking foreclosure.
However, new reverse mortgage rules from HUD that take effect October 1, 2017 could impact how seniors can access their homes’ equity. Here’s what you need to know about HUD’s changes to the Home Equity Conversion Mortgage Program (HECM).
What’s wrong with HECM now?
The federal government funds the Home Equity Conversion Mortgage (HECM) Program, meaning taxpayers end up paying for it. Right now, the program is losing money. In fact, unless HUD puts these new regulations in place, they say they won’t be able to fund any new reverse mortgages in fiscal year 2018. That starts October 1st.
So, rather than ending the program, Secretary Ben Carson and HUD want to adjust the rules. They say the changes will help avoid ending the program, so seniors can still have a low-risk way to borrow.
Change #1: You won’t be able to borrow as much
HUD has always set limits on how much money an eligible senior can borrow through HECM. The amount varies, based on your age and the interest rate on the reverse mortgage. The older you are, the less you can borrow. A low interest rate also means you can borrow less.
Under the new rules, those borrowing limits will be even lower. Your reverse mortgage lender will determine the exact amount using a complicated table system that calculates Principal Limit Factors.
Still, accessing a lower amount of money isn’t necessarily a bad thing. You don’t have to make payments on a reverse mortgage, but the money eventually gets paid back. If you sell the house or it passes to your estate, the money you borrowed comes due. It’s usually paid back with the proceeds from the sale of the home. So, if you borrow less that means you or your heirs can still profit from the property sale.
Change #2: You can expect initial cost to be higher, but ongoing costs will be lower
There are several costs you must cover when you take out a HECM reverse mortgage:
- Loan origination fee
- Lender servicing fee
- Third-party closing costs, such as appraisal and title search
- Mortgage Insurance Premium (MIP)
It’s that last cost that’s going to increase under the new rules. MIP is basically FHA mortgage insurance that covers the lender in case there’s a default. It’s calculated by taking a percentage of the mortgage loan amount that you take out. Initial MIP was 0.5% as long as you borrowed less than 60% of your home’s value within the first year; if you borrowed more than that, it jumped to 2.5%.
Under the new rules initial MIP is set at 2.0% for everyone, regardless of how much you take out in the first year. You also pay MIP each year you have the loan. Annual MIP under the new rules will be 0.5% instead of 1.25%. So, while the new reverse mortgage rules make lending more expensive upfront, the annual costs are lower.
It’s important to note that the lender rolls MIP in as part of the loan. That mean you don’t actually pay it out of pocket. But the costs will come out of the money you have available to borrow.
HUD-certified housing counselors can help you understand these new rules
If these new reverse mortgage rules concern you or you aren’t sure what they mean, talk to a housing counselor. A HUD-certified expert will be up-to-speed on the new rules and what they mean for your costs. They can also help you estimate how much you are eligible to borrow based on your age and credit.
What’s more, you must go through reverse mortgage counseling with a housing counselor before you can apply. So, reaching out to a housing counselor knocks out two birds at once.
If you’d like to learn more about reverse mortgages, call 1-800-435-2261 to speak to a HUD-certified housing counselor now.