Changes to Reverse Mortgages (HECM’s)

In a prior blog post, I discussed what a Reverse Mortgage is. I also went into detail about some of the basic rules to qualify for one, where you get them, and cautioned about the negative aspects of them.  The U.S. Department of Housing and Urban Development recently changed some of the guidelines to implement policies issued under the Reverse Mortgage Stabilization Act (RMSA), the Housing and Economic Recovery Act (HERA), the National Housing Act, and Public Law 111-229.

Changes to Home Equity Conversion Mortgage

Some of the guideline and policy changes include:

1. The upfront cost to do a HECM used to be 0.5 percent of the home’s value. Now, the upfront cost is 2 percent of the home’s value.
2. The principal limit factor lowered to 0.5 percent, which means less credit will be available.
3. The fee reduced from 1.25 percent to 0.5 percent which translates to the borrower’s line of credit growing more slowly over time and reduces the ongoing payments.

A Warning to Retirees

As the baby boomer generation retires, financial advisers have consistently suggested retirees use reverse mortgages for cash management.  Essentially, if a person wanted or needed to retire at 62 years old, they could take out a reverse mortgage in order to have a cash flow to pay living expenses and delay drawing social security until age 67 or 70 and thus maximize their social security benefit.

A CNBC article by Deborah Nason discusses reverse mortgages in fuller detail. The article references a brief issued by the Consumer Finance Protection Bureau in August warning consumers not to do this. The cumulative increase in Social Security a homeowner would receive in a lifetime from delaying the social security benefits does not outweigh the cost of a reverse mortgage loan.  Many older homeowners have some equity in their home, and it is their most valuable asset.

 

In conclusion, you should tread very carefully when deciding to do a reverse mortgage.  If you have financial issues, Bond & Botes attorneys can discuss your options and how best to proceed.  Please contact one of our locations for a free, no obligation consultation.