Reverse mortgages can be a great way for retirees to supplement their retirement income. But changes to the government’s reverse mortgage program could change whether it’s worth it to get one. Effective October 2, 2017, the U.S. Department of Housing and Urban Development (HUD) has made a couple of changes to its Home Equity Conversion Mortgage (HECM) program.
Two new rules for reverse mortgages you need to know
If you’re interested in getting a reverse mortgage, here are the two rules the government has placed on the HECM program, which makes up 99% of reverse mortgage loans, according to the National Reverse Mortgage Lenders Association.
Here are the new rules:
- Insurance premiums have been adjusted: Upfront mortgage insurance premiums used to range between 0.5% and 2.5% of the loan amount, depending on how much you borrow. Now, the premium will be a flat 2%.
To help make up for the increased cost for some borrowers, HUD adjusted ongoing insurance costs downward. Borrowers will now pay 0.5% annually rather than the previous 1.5% rate.
- The borrowing limit is lower: For new borrowers looking to provide some extra retirement income through a reverse mortgage, they’re not limited to how much they can get. Before the new rule became effective, retirees could borrow up to 64% of their home value. Now, that limit is roughly 58%.
Why the new rules?
The government’s HECM program makes up the vast majority of reverse mortgages because the government insures it. But since 2009, the program has had $12 billion in losses.
“Given the losses we’re seeing in the [reverse mortgage] program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD Secretary Ben Carson said through a spokesman.
As a result, the new rules are more to keep the program solvent than to protect borrowers.
Is a reverse mortgage still a good idea?
Reverse mortgages are still a good option for supplementing retirement income. But as before the new rules, going into one when the numbers don’t work is not a good idea. If you can’t make the ongoing insurance and property tax payments, you stand to lose your home.
As always, it’s important to run the numbers and compare lenders to make sure the costs and limits are doable. As you do your due diligence, you’ll have the peace of mind to know that you’re making the right decision.