Seniors recently received a “good news, bad news” change to the most popular reverse mortgage program in the country. Borrowing costs will drop — the good news — but the bad news is that many will be able to borrow less money against their homes, according to the revisions by the U.S. Department of Housing and Urban Development, or HUD.
The Oct. 2 changes to the Home Equity Conversion Mortgage program, or HECM, are meant to keep the program stable and paying for itself.
Upfront premiums for mortgage insurance through the program were raised, though annual premiums over the life of the loan were lowered. Called the Mortgage Insurance Premium, or MIP, the rates would be lower overall and could make taking more equity out of a home easier.
The bigger change, however, is how much money homeowners can borrow through a reverse mortgage — 6 percent less than they could under the old rules.
The changes will lower the lines of credit available through a reverse mortgage, which if unused in the early years of retirement could allow borrowers to take out much more than the value of their home in later years.
“It’s probably the most significant change in a long time” to the program, says Greg Cook, a reverse mortgage specialist at Reverse Lending Experts in Orange County, Calif.
All of the changes only affect borrowers with new loans through reverse mortgages. They won’t affect existing borrowers.
First, what’s a reverse mortgage?
HECM is the most popular reverse mortgage program. It became a permanent program in 1998 and has insured nearly 1 million reverse mortgages since its creation.
Reverse mortgages are used by homeowners 62 and older to pay for home improvements, bills, health care or to help fund retirement. The home is used as collateral and homeowners can receive money as a lump sum, monthly payment, or line of credit.
Reverse mortgages allow people to live in their home and receive income from their home equity until they die, move or sell their house. The loans are repaid at that time.
HECM is in financial trouble, according to HUD, and the recent changes are meant to keep the overall insurance fund healthy. In fiscal year 2016 HECM had a value of negative $7.7 billion, according to HUD. Losses “are making it increasingly challenging for FHA to maintain the overall reserves that Congress requires,” HUD wrote in explaining the changes.
The uncertainty of home prices, interest rates and other factors have made HECM historically volatile, according to HUD. The changes are meant to improve the program’s financial health and ensure that traditional FHA-insured “forward mortgages” aren’t routinely bailing out the reverse mortgage program, HUD says.
“I think if HUD was going to maintain a program that was going to last a long time, they had to tweak the numbers,” Cook says.
The HUD changes will allow most seniors to borrow less money. The average borrower will be able to borrow approximately 58 percent of the value of their home, down from 64 percent.
The principal limit factors, or PLFs, were lowered to preserve the homeowners’ equity in the home if they continue living in the house into old age. People are living longer and instead of having a reverse mortgage for 15 years, they’re having them for 20 to 30 years, Cook says.
Previously, reverse mortgage borrowers could have a line of credit equal to half of their home’s value when they started the reverse mortgage, and that amount would grow over 29 years, Cook says. Healthy retirees who lived a long time could be millionaires with a reverse mortgage by having a line of credit worth more than their home’s value.
Using the old format, Cook gives the example of someone age 70 with a $600,000 home. They’d start with a $300,000 line of credit, which would increase in 29 years to about $1 million — no matter if their home’s value went up or down. The new rules would lower that to $778,500.
“The days of millionaires are over,” Cook says.
The new PLF tables will give reverse mortgage borrowers less home equity to borrow from, down from 64 percent of the value of their home to about 58 percent.
PLFs generally rise with borrower age. The new changes essentially reduce the PLF across the board, Cook says, with people age 62-65 who are recently retired or getting close being impacted the most. They’ll lose about 10 percent in how much money they can take out in a reverse mortgage.
For a 62-year-old, “Unless they own their home free and clear, its going to be hard to make sense” to have a home equity line through a reverse mortgage, Cook says.
The average age of someone getting a reverse mortgage is 73, Cook says. They can borrow more than younger people, and a slight reduction in their eligible amount isn’t likely to influence their decision much to get a reverse mortgage, he says.
As part of a reverse mortgage, borrowers can get a lump sum or a smaller amount of money upfront, and then get a line of credit or receive monthly payments. The new rules lower the credit line and amount that can be taken upfront, but increase the monthly payments.
Cook says he’s working with a 71-year-old woman whose home is valued at $244,000 who could see her monthly payment from a reverse mortgage increase from $320 under the old program to $534 under the new one.
However, the new program would give her less money through a line of credit: $41,000 now instead of $50,000 under the old rules. The money she could get upfront would also drop from $71,000 to $55,000.
Mortgage insurance changes
HUD also changed the mortgage insurance premium (MIP) so that borrowers are paying more upfront and less in annual premiums.
Previously, borrowers taking 60 percent or less of the loan proceeds upfront paid only 0.50 percent MIP. Someone borrowing more than 60 percent would pay 2.5 percent. Now everyone pays the same upfront MIP of 2 percent, regardless of the amount borrowed.
Ongoing MIP rates also changed. Historically the annual MIP was 1.25 percent of the outstanding loan balance. That’s being lowered to 0.5 percent, which could offset the larger upfront MIP.
While the HUD changes may lessen home equity access to many reverse mortgage borrowers, overall the program should become cheaper and should still do the job it’s intended to do, Cook says.
“In the long run, the program becomes more in tune to the people who need it,” he says.