Reverse Mortgage Changes on Oct 2nd – The Pros and Cons
The Department of Housing and Urban Development (HUD) which oversees FHA and subsequently Reverse Mortgages announced late in August that the Home Equity Conversion Mortgage AKA HECM/Reverse Mortgages will be undergoing some major changes on October 2, 2017.
The initial reaction across the industry has been one of urgency and panic as the reverse mortgage changes pose a serious impact on people looking to do a Reverse Mortgage in the near term but as we’ve dissected the changes we’re finding the long-term effects will have a very positive outcome for everyone involved.
What are the Changes? –
There are two primary changes that most people have focused their attention on. 1. A reduction in Mortgage insurance premiums both in the upfront charge as well as the annual premium. 2. The other less predictable change has to do with the Floor Rate which was dropped from 5% to 3%.
Pro- These are the positive aspects of the changes
- Reduction in upfront MIP from 2.5% for most borrowers to 2.0%.
- Reduction in the annual MIP from 1.25% to .5% for everyone.
- An indirect reduction in interest rates which on average are now roughly 5% and will (in my opinion) fall to an average of 4% or possibly lower.
Cons- Though maybe not a true negative, most people are looking at this as a negative impact.
- Reduction in the Principal Lending Factor by 5%-11% on average, AKA the amount of equity the homeowner can access.
Ultimately what these reverse mortgage changes mean is that the bank and FHA will be adding less over time to the balance of the loan. Likewise, the Borrower will not be allowed to borrow as much money which will also reduce the amount of the mortgage and interest growth over time.
This basic example illustrates the impact of these changes.
Imagine a 62 year old borrower had a $400,000 home The figures below show how this loan changes by doing a HECM today vs. after October 2nd.
Now my numbers are just estimates of course and many things may change with the actual implementation of the changes next month but if this scenario is accurate this homeowner will save just under $6,000 of their equity in the first year, an additional $4,000 the second year, and similar savings every year thereafter. Over the course of a 20-30 year lifespan these changes could potential protect tens if not hundreds of thousands of dollars of equity.
Why they change? –
As you can see in the example provided, the reverse mortgage changes do limit the borrower initially but the end result of these changes is that the homeowners equity which typically is expected to be exhausted at age 90-95 will now be extended another 10-15 years. This protects both the homeowner, their estate, and the FHA Mortgage insurance fund making HECM Reverse Mortgages a better long-term option.
Life expectancy today is just over 80 years in America and that number grows by about six months every year. In 20 years life expectancy is likely to be beyond 90 years of age. But imagine what will happen to that number if medical advancements are able to cure common diseases such as cancer, Diabetes, Heart Failure, Parkinsons, or Alzheimers disease. There is a very real scenario where our children’s life expectancy could exceed 120 years and beyond. This all is speculative but it is non-the-less a real possibility and HUD recognizes the impact these changes could have on the viability of the Reverse Mortgage product which is why these changes were made now.
As I’ve said before, Reverse Mortgages will eventually become as common as 401Ks, Pensions, or Annuities, but for that to happen the program must continually evolve to match the people who are using it.
If you or someone you love is curious about how a HECM Reverse Mortgage would make life better, call me today to find out more.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770
For more information about these Reverse Mortgage changes see the articles linked below.