CHICAGO If you've been thinking about getting a reverse mortgage, September offers a model-year closeout sale opportunity.
A new set of rules governing Home Equity Conversion Mortgages (HECMs), the most popular type of reverse loan, has just been issued by the U.S. Department of Housing and Urban Development, following up on Congressional action last month authorizing reforms.
The upshot: Starting in October, HECM loan types will be consolidated, loans will be smaller and fees will be higher. There will be new limits on how much you can draw down on a HECM during the first year of your loan. And starting in January, some borrowers will be required to put a substantial part of their loan proceeds in escrow accounts to pay future property taxes and insurance costs.
The reforms are badly needed. The HECM program has experienced rising loan defaults, posing risk for the Federal Housing Administration insurance fund, which backstops the loans.
But for borrowers, the new rules mean navigating a changed HECM market.
Currently, homeowners age 62 or older can qualify if they have sufficient equity in their property. The amounts you can borrow are determined by a formula that takes into account the percentage of the home's value based on the borrower's age and prevailing interest rates.
Although reverse loan borrowers don't have to pay back their loans until they move out of their homes or die, defaults are possible because the loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their homes.
The changes are aimed at making HECMs safer for seniors, and to discourage their use as a Hail Mary pass.
"It really presents a shift toward utilizing the HECM as a long-term financial planning tool, rather than something for crisis management," says Amy Ford, director of the National Council on Aging's reverse mortgage counseling services network.
Here's a look at the key changes.
FEWER LOAN TYPES, HIGHER FEES
HECMs come in two flavors - standard and "saver." Standard HECMs offer large loan amounts (up to $625,500) and carry higher fees; saver HECM loan amounts are 10 to 18 percent lower than standard loans, depending on the borrower's age. But fees are much lower.
Going forward, there will be only one type of HECM loan, and fees will vary depending on how much you borrow.
Next month, the mortgage insurance premium for larger loans (more than 60 percent of the available principal) rises to 2.5 percent of your home's appraised value, up from two percent. For loans below the 60 percent threshold, the fee is 0.005 percent, up from 0.001 on the old saver loans. The fees were increased to shore up reserves of the FHA Mutual Mortgage Insurance Fund, which is used to repay lenders in situations where they can't recover the full amount at the loan's termination.
SMALL LOANS, SLOWER DRAW-DOWNS
Limits on the size of larger loans will be reduced, starting next month. The formulas governing loan amounts are complex, but the cuts amount to roughly a 15 percent reduction, according to Peter Bell, president of the National Reverse Mortgage Lenders Association.
In general, borrowers won't be able to access more than 60 percent of the total loan in the first 12 months. This change is aimed at discouraging large drawdowns that can leave borrowers strapped later on if proceeds are used up and other income sources dry up.
Starting in January, borrowers will be required to undergo a financial assessment to make sure they have the capacity to meet their obligations and terms of the HECM. Lenders will be required to assess your income sources, including income from work, Social Security, pensions and retirement accounts. Your credit history also will be considered.
Riskier borrowers can be denied, or required to make a "set aside" fund out of loan proceeds to pay future property taxes, hazard insurance and even flood insurance in areas identified as flood zones by the federal government. The amount of money set aside could reduce loan proceeds substantially, since it will based on the borrower's life expectancy.
So, how about that model-year closeout sale? It's over on September 30. You'll be able to qualify for a loan under the old terms if you apply, undergo required financial counseling (different from the new financial assessments) and have a loan case number by that date.
NCOA offers two online tools that can walk you through the options. The Home Equity Advisor helps you assess whether a HECM is a good fit for your current living situation. NCOA's Benefits Check-up can help you identify benefit programs that can help subsidize prescription drug, healthcare or food costs, or reduce your property taxes.
Ford urges seniors in need of cash to think carefully about all their options before borrowing.
"Do you want to tap home equity at all? That's the first question to ask," Ford says.
(The author is a Reuters columnist. The opinions expressed are his own.)