2009 Reverse Mortgage Update and Considerations
In February, 2009, the FHA limit (the amount of the home value considered in the benefit calculation) was increased from $417,000 to $625,500.
This increase is scheduled to expire at the end of 2009 unless Congress extends it.(Note: Congress did extend it to 12/31/2010.)
The following will include a little history, facts, considerations and recommendations. They are designed to help you decide if doing a reverse mortgage now would be an advantage over waiting.
Until late in 2008, the amount of money in a reverse mortgage was determined by your home value or the FHA limit in your county, your age and current interest rates.
The Housing and Economic Recovery Act of 2008 contains the FHA Modernization ACT of 2008. (Tech Alert - I provide the link in case you wish to see the actual legislation (depending on how it is printed, it totals about 300 pages) and I will provide you Section and Title numbers to guide you, but it is really more than the average person needs to look at) The part about reverse mortgages is in Title I beginning with Sec 2122 and titled Home Equity Conversion Mortgages (HECM).
Work on The FHA Modernization Act started in 2006. But both houses of Congress could not agree on it in 2006 or 2007. Even then it was only agreed on in late 2008 as part of the Recovery Act that was considered emergency legislation.
That legislation changed the limits that differed by county to one national limit of $417,000. Until this, you might live in a $500,000 home in a county with $250,000 average home values and the amount you got on a reverse mortgage was based on the lower FHA limit of $250,000. Even with the raise in limits to $417,000, that person with the $500,000 home did not get the full amount they might have if the full value of their home was considered.
That legislation also provided that high cost areas (by county again) might be eligible to use limits up to $625,500. However, when HUD implemented the legislation by issuing what is called a 'mortgagee letter' to lenders, they only included the $417,000 change with no differences for high cost areas.
The American Recovery and Reinvestment Act of 2009 raises the FHA limit to $625,500 nationwide.
The legislation is expected to expire at the end of 2009 unless extended by Congress.
Interest rates are low.
Home values have dropped in many areas.
HUD issued the required Mortgagee Letter making the $625,500 limit effective on February 24, 2009.
For potential reverse mortgage borrowers with homes valued as less than $417,000, the new legislation did not change anything. However, there are other considerations for these people. See the Considerations index page.
If you have a home valued over $417,000, this may be an opportunity to get more money in a reverse mortgage than prior to that legislation. That opportunity may expire after 2009 if Congress doesn't amend that date. Remember from the History section that Congress could not agree on the legislation regarding reverse mortgages for over 2 years.
There are four items that determine how much money is available in a reverse mortgage. They are the home value, the FHA limit, the age of the youngest borrower and current interest rates on the 10 Year T-Bill. Of the four, age is least volatile and most predictable. But the amount of money you can get from a reverse mortgage in the future (say when you are 1 year older) is not predictable. Within a one year period the amount of money you can receive from a reverse mortgage can fluctuate significantly from the other items. Predicting 5 or 10 years is nearly impossible with so many variables. See my page on Now or Later.
There is a floor on the interest rate used to determine how much money is available in a reverse mortgage. That number is 5.5%. At the writing of this page, most lenders are near or below that limit. That means lower interest rates on the 10 Year T-Bill will not increase the amount available. However, increases in that rate will reduce that amount.
In many areas, home values are dropping. If your home value is estimated to be below $625,500, any further value reduction will reduce how much money you can get.
However, many people think because their home value has gone down, that there is less money than there was previously. That may not be the case. If their home was valued over the FHA limit, the full value of their home was not used to calculate their benefit. Additionally, interest rates may be down from when they looked into reverse mortgages. There could very easily be more money available than when their home was worth more.
Do you think your home value will increase prior the the possible elimination of this new FHA limit or prior to interest rates going up?
In the 2008 legislation, Congress capped the origination fee the lender can charge. At the $417,000 level, it was $6,000. That cap was not changed and it will still be capped at $6,000, even for a home at the $625,500 level.
In the 2008 legislation, Congress did NOT cap the Mortgage Insurance Premium (MIP) that goes to FHA. It is 2% of the loan amount. Prior to the 2008 legislation, it was 2% of $362,790 or $7,255.80. When the limit went up to $417,000, it was 2% of $417,000 (for homes valued at or above $417k) or $8,340. With the limit going to $625,500, the maximum MIP will be $12,500. If the home is valued at less, it will be 2% of the home value.
If you have an Adjustable Rate Mortgage that is resetting in the next year or so, you might consider this as a good time to do something about it.
If you have a multi-million dollar home, there may not be as much money as a 'jumbo' reverse mortgage might offer. But you will have to wait for jumbos to reappear.
With all this, if you have an existing mortgage, it may still be possible that there isn't enough money in the system to pay off those mortgage(s).
The first question to ask yourself is if you have any interest in a reverse mortgage now or in the future. If not, this is a mute point. Read other pages from the Considerations Index page to make sure you aren't overlooking something.
If your home is valued at less than $417,000, you probably don't have to consider the limit being reduced at the end of 2010. A decrease, though, in your home value will affect you. Again, review the Considerations Index to see if you should make a decision now or later.
If your home is valued at more than $417,000 and you were thinking of 'someday' doing a reverse mortgage, this may be the right 'window of opportunity'.