Oct 23, 2013

Reverse mortgages: new rules, always coordinate with your estate plan and long-term care plan

Reverse mortgages have been a boon for some of my Florida clients who need cash during their retirement. The financial crash of 2008, more retirement years, the increased chance of extended disability, and of course the high course of health care have fueled the popularity of reverse mortgages in recent years. That popularity, however, has come at a price. In recent years an increasing number of the loans have gone into default as seniors have increasingly found themselves unable to keep up with their home's property taxes and insurance premiums. So rather than allowing these seniors to remain in their homes, the loan has only delayed the process of losing it. According to a Feb 2013 report to the House Financial Services Committee, projected losses for the nation's reverse mortgage program stood at $2.8 billion as of 2012.

In April, I told you about the Federal Housing Authority's new rules under the Reverse Mortgage Stabilization Act of 2013, designed to protect borrowers as well as maintain the solvency of the ailing government-backed HECM (Home Equity Conversion Mortgage) program. More rules were put in place effective September 30, and even more are on the way next year.  The FHA's new rules are aimed at making sure seniors borrow only what they need and can afford. 

What is a reverse mortgage and who qualifies? 

To qualify for a reverse mortgage, you must be 62 or older. A reverse mortgage allows a senior to borrow against the equity in his/her home - often a senior's most valuable asset - without having to pay off the loan until he/she moves, passes away, or sells.

Changes that went into effect on April 1, 2013:


The fixed rate HECM Standard mortgage was discontinued, and a new program, the HECM fixed rate saver mortgage, was put in place. The new program requires seniors who wish to have a fixed-rate loan to apply for the rate saver mortgage, which provides a smaller payout from the borrower's home equity, although the up-front costs are lower. The Upfront Mortgage Insurance Premium is .01% of the lesser of the appraised value or current $625,000 lending limit.


Changes that went into effect September 30, 2013:


  • Smaller Loans: Borrowers used to be able to take up to 61.9% of the home's value. That has now been reduced by 15%.
  • First-year limit: No more than 60% of the available funds may be withdrawn during the first year.
  • Fees: The up-front fee is .5% of the appraised value of the home. For seniors who for various reasons wish to take out more than 60% of the value of their home, the up-front fee is 2.5%.


Changes that will go into effect January 13, 2014: 


Starting in January, would-be borrowers will face tougher scrutiny  to determine if they can handle the costs of property taxes, property insurance, and maintenance on their home. Income and credit history will be examined. If the borrower does not have sufficient funds each month to handle the obligations, he will be required to make a cash set-aside that may be drawn from payments or charged to a line of credit.

Taking out a reverse mortgage has serious economic ramifications. It is certainly not for everyone, and must only be done with an abundance of caution and serious analysis. It must also be carefully calibrated with your estate planing and your long-term care planning to avoid possible negative consequences. Contact us for assistance.

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