Thinking about getting a reverse mortgage? The government has just made it tougher to get one, and put an end to one of its most popular loan products.
Home Equity Conversion Mortgages, also known as reverse mortgages, are available to homeowners 62 years or older who own all or most of their home free and clear of any existing debt against the property. Generally, the lower the interest rate and the older the borrower, the bigger the available loan.
But the Federal Housing Administration announced this past week that starting April 1, homeowners will no longer be able to get a fixed-rate standard HECM loan, in which the borrower draws down all of the available equity in their home. These loans, by far the FHA's most popular reverse loan, are largely responsible for a $2.8 billion deficit in the agency's insurance program.
While seniors will no longer be able to get full-draw HECM loans with fixed interest rates, they still have other options. Indeed, they can still borrow the maximum amount against their home with a standard loan, albeit with an adjustable interest rate. But Jeff Taylor, president of Greensboro, N.C.-based Wendover Consulting and a pioneer of the reverse mortgage industry, says for most seniors, a variable rate shouldn't be a major concern.
If the borrower doesn't need to tap the maximum of equity from his home, such as to pay off an existing mortgage, he or she can get a "Saver" HECM, which comes in fixed and adjustable-rate varieties. While this type of loan can reduce the amount a homeowner can borrow by between 10 percent and 18 percent compared with a Standard HECM loan, it does come with sharply reduced mortgage insurance premiums: a negligible 0.01 percent of the home's value compared with an up-front 2 percent fee on Standard reverse loans.
Saver loans, Taylor says, are more appropriate for a senior looking to establish a line of credit they can tap to provide a monthly income stream, pay medical expenses, or create an emergency fund. Taylor says Saver loans are competitive with home equity loans, and the borrower isn't required to make monthly payments.
When the borrower/homeowner leaves the home or dies, the proceeds from the sale of the home are used to repay the loan; The FHA makes up the difference if there is a shortfall between the amount of the loan and the sale value of the house.
While most borrowers prefer fixed-rate mortgages, those loans "are not necessarily the most economical choice on a reverse mortgage," said Peter H. Bell, president and CEO of the National Reverse Mortgage Lenders Association.
Bell says a Saver loan may actually be a better choice for many borrowers to ensure they don't take out more money than they really need.
The FHA also is considering other big changes to its HECM program, including requiring lenders to do a financial assessment to ensure the loan is suitable.
for the homeowner.