2010 Reverse Mortgage Update and Considerations
Possible Changes from FHA
First, read my 2009 updates page. It still is important for those with homes valued over $417,000 since the $625,500 limit is due to expire on 12/31/2010.
Second, not noted on that page is that HUD reduced the Principle Limit (what I call your Benefit - the amount of money you get from a reverse mortgage) by 10% with about 7 days notice in October 2009. What that means is that if you were to receive $300,000 in September but hadn't started your application until November, you received $270,000 (assuming all other factors used to calculate your benefit hadn't changed.
Now, (March 11, 2010) HUD is proposing more changes that will
reduce your 'Benefit' and increase your accumulating costs.
Start by taking a quick look at this article -
Without $250 Million HECM Subsidy, Big
Principal Limit Reduction Needed says FHA .
It has been estimated, that due to declining home values, the insurance fund for Reverse Mortgages will not have enough money
available to make up for potential future loses. A subsidy of
$250 million is being requested. FHA (HUD) has two plans for
Reverse Mortgages going forward. What to do if they get the
subsidy. What to do if they don’t get the subsidy.
If they get the subsidy, they plan to increase the annual MIP (Mortgage Insurance Premium) from 0.50% to 1.25%. On a $100,000 balance, that increases the yearly fee from $500 to $1,250, compounding each year and growing with the increasing balance. It can get to be a big number. Additionally, they will reduce the Principle Limit (‘your benefit’) by 1-5%.
If they don’t get the subsidy, they plan the same increase to the MIP as well as reducing the Principle Limit by 21%.
Last year, repeating what I said above, they reduced the Principle Limit by 10% with less than a week’s notice. For someone who would have received a benefit before the reduction of $300,000, the benefit was $270,000 after the reduction.
With all things being equal (the calculators of a Reverse Mortgage – home value, age, interest rate) the Principle limit could be reduced from the $270,000 example above to $213,000.
But all is not equal. In some markets, home values have continued to decline. The interest rate used to calculate the Principle Limit has increased. My crystal ball is a bit cracked but I don’t see a way to predict there will be more money available in a Reverse Mortgage for years to come. With one exception (the increase in the FHA maximum to $625,500 – due to revert to $417,000), all the changes recently have been negative.
Update as of 10/4/2010 Confirming that the annual MIP was increased from 0.5% to 1.25%. The Principle Limit was reduced 2.4% to 12% depending on age. Interestingly, the older borrowers received the bigger cut. See more detail about the changes at How Much Can You Receive.
Changes From My Company
My company just came out with a twist to the fixed rate – no monthly servicing fees. This also eliminates the Service Fee Set Aside (usually subtracting $4-5000 from how much money you receive). This is a great benefit if the fixed rate (which requires you to take all the funds up front) is the better choice over the adjustable rate (which allows you to leave some or all of your benefit in monthly payments or a line of credit).