Most seniors hoping to use reverse mortgages to get money to help them better afford to age in place will soon face stricter limits on how much cash they can draw from their homes, along with higher upfront costs to get these loans.
Reverse mortgages offer seniors an opportunity to tap the equity in their homes so they can meet their expenses without having to move. The Department of Housing and Urban Development (HUD) this week announced the tougher rules, which will take effect Oct. 2. None of the changes will affect people with existing reverse mortgages.
Federal officials say the changes are necessary to improve the financial health of the federally insured reverse mortgage program, which has suffered losses in recent years.
The program “is losing money and can no longer remain viable in its present form,” HUD said in a fact sheet released Tuesday.
An AARP Public Policy Institute analysis of HUD data shows that under the new rules, a 62-year-old borrower getting a reverse mortgage with a 5 percent interest rate would be able to draw 11 percent less money from a home than under current rules. For an 80-year-old borrower, there would be a 12 percent reduction.
Another key set of changes involves the insurance premiums that borrowers have to pay when they first take out a reverse mortgage and the annual premiums they pay over the life of the loan. The new rules require higher initial premiums in most cases but lower annual premiums in subsequent years.
Under the current rules, the initial premium is 0.5 percent of the appraised value of the home for most borrowers. Under the new rules, it will be 2 percent for all borrowers. The 2 percent rate will represent a reduction for one category of borrowers: those who take out larger reverse mortgages and currently pay a 2.5 percent upfront premium.
One encouraging change for seniors contemplating a reverse mortgage is that the annual mortgage insurance premiums borrowers are required to pay over the course of their loans will drop from 1.25 percent to 0.5 percent.
The federal government has insured more than 1 million reverse mortgages since its program began in 1989. To participate in the program, homeowners must be at least 62 and either own their homes outright or have small loan balances.
The amount people can borrow depends on various factors, including their age, home value and interest rates. Older borrowers with more valuable homes typically are eligible to borrow the most.