The federal government is again modifying the reverse mortgage rules. These changes impact the cost of insurance and borrowing limits, which create a mixed bag for borrowers.

Kiplinger’s recent article, entitled “New Rules for Reverse Mortgages,” explains that upfront mortgage insurance premiums will be a flat 2% for every loan.

This change means some applicants will pay more, and others will save. If you qualify to take up to 60% of the eligible loan amount in the first year with the remainder available the following year, your upfront cost will increase 1.5% from the previous 0.5%. For those who qualify to take more than 60% in the first year (usually in cases where an outstanding mortgage must be paid off), the upfront cost drops by half a point, from 2.5%.

In addition, the ongoing insurance costs will decrease for all borrowers. The annual premium will drop from 1.25% to 0.5%, which over time, could have a significant impact. The lower ongoing cost may offset much or all the higher upfront cost.

The calculation for maximum loan proceeds is also being adjusted: the adjustments will impact most new borrowers and will cut potential proceeds by 10% to 12%. The new rules drop the percentage of the home value that’s available to borrowers at most ages and at most interest rates. The older you are and the lower the interest rate, the more proceeds you get. However, most will now qualify for less than before the changes.

These changes, which went into effect on October 2, are the latest government effort to secure the federal Home Equity Conversion Mortgage program and alleviate worries about the health of its insurance fund.

Most reverse mortgages are federally backed HECMs, and the government will pay for any gap, if the house sells for less than the loan’s balance.

These changes are raising costs all around, while at the same time lowering borrowing power. That combination could make reverse mortgages unattainable for some seniors. Observers say it’s not just applicants on the edge who may no longer be able to use reverse mortgages: the rule changes also diminish the “standby strategy.” That means creating a reverse mortgage line of credit as a reserve that a retiree can use if and when it’s needed. The upfront costs will now be higher. The lower ongoing insurance cost may be helpful to some, but the savings may be lessened due to the fact that you don’t pay the annual premium on the untapped line of credit. You pay only on any balance you’ve accrued.

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Jeffrey Bellomo, Esq.

Reference: Kiplinger (September 11, 2017) “New Rules for Reverse Mortgages”