The Federal Housing Administration has formally approved a new reverse mortgage product that sharply cuts upfront payments by home owners but also significantly reduces the percentage of a home’s equity that can be paid to owners under the program. Reverse mortgages insured by the government are available on homes where the youngest owner is at least 62 years old. The program is called a Home Equity Conversion Mortgage (HECM).
“In trying to make an informed decision, the prospective HECM borrower should consider: (1) the need for the loan and length of time they intend to remain in the home; (2) the amount of available loan proceeds, (3) the associated closing costs for obtaining the loan; and (4) whether the property’s existing indebtedness can be satisfied with the loan proceeds or whether the borrower will need to draw from other financial resources.”
Changes to the current products (which HUD is now going to call HECM Standard).
Around the beginning of September HUD announced it would give 1%-5% less benefits and that the annual mortgage insurance rate would increase from .5% to 1.25%. What did not get significant coverage was an announcement that came in Mid September that HUD was going to reduce the floor on the Expected Interest Rate from 5.5% to 5.0%.
That change has made significant improvements for borrowers who are applying now AND, it seems as if the younger the borrower, the better the benefit. The older borrower doesn’t fare as well.
Examples:
1) A 63 yr old person in a $200,000 home applied on 9/30 and the gross amount of the benefit as $113,800. When his loan closed, he received $125,000.
2) A 74 yr old person in a $625,500 home applied in August and the gross amount of the benefit was $406,575. When he closed in October, he received $430,969
3) I had a 94 yr old woman that closed in July. On her $120K home, she received $96,120, but she would only have received $93,120 if she closed under the new guidelines.
Ultimately, it is up to the consumer to choose the best solution for themselves.