One of the most significant developments in the history of reverse mortgages occurred recently when FHA Commissioner Brian Montgomery announced that a new single national limit had been reached, eliminating critical geographical boundaries for many seniors in the country’s most popular reverse mortgage program.
Loans insured by the Department of Housing and Urban Development, known as Home Equity Conversion Mortgages, or HECMs, now have a common ceiling of $417,000, regardless of where the home is located.
Previously, the HECM program assigned different lending limits by county ranging from $200,160 in rural areas to $362,790 in the highest home-value areas. The new, higher lending limit will enable borrowers to obtain a substantially greater benefit from their homes, if the value is higher than the previous HUD limit.
Similarly, existing borrowers whose home value is greater than the new HUD limit may be able to increase their benefit by refinancing their reverse mortgage and are encouraged to contact their lenders to weigh fees and costs to determine if it makes sense to refinance.
Lenders and consumers have been pushing for the single national limit for more than a decade, arguing that the longtime method of assigning limits by area for HECMs was too restrictive. All interested parties had been waiting for clarity on a figure — if the single national limit would be set at $417,000 or $625,500, or a sliding scale somewhere in between. While many borrowers had hoped for a higher benchmark, the $417,000 number came as no surprise given the state of the conventional lending environment.
"HUD should be applauded for its expedient implementation of the single national loan limit for the HECM program, especially during such a tumultuous period," said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C. "The higher single national loan limit and other provisions expected to be implemented in the coming months make reverse mortgages a more viable retirement financial option for a broader audience who can receive higher benefits at lower origination fees than ever before."
The Housing and Economic Recovery Act of 2008 recently reduced the maximum fee to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home’s value or the county lending limit, whichever was lower.
Bell said the new formula for maximum origination fees would become effective concurrently with the Nov. 6 implementation of the new HECM loan limits.
Since HECMs were first launched as a pilot program in 1989, loan maximums have been slow to rise. In 2004, for example, the highest of the loan limits — applicable generally to major metropolitan areas — increased to $290,319, up from $280,749. The lowest loan ceiling, which typically applies to rural and non-metropolitan areas, rose to $160,176, up from $154,896. Clearly, a senior with an expensive home in a rural area did not find the HECM appealing.
More than 450,000 HECMs have been made since 1989. FHA, a branch of HUD, insured 107,367 HECMs in 2007 compared with 43,131 in 2005.
A reverse mortgage enables senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.
Borrowers can choose to receive the reverse mortgage funds as a lump sum, monthly income, line of credit, or as a combination of monthly income and line of credit.
They can use the funds anyway they wish — for home repairs and improvements, medical costs, in-home care, education and supplemental retirement income. Borrowers make no monthly payments on a reverse mortgage during its term. The loan becomes repayable when the borrower sells the home or permanently moves out. In addition, the repayment amount can’t exceed the value of the home.
Reverse mortgages are originated largely by private lenders. Most are members of the National Reverse Mortgage Lenders Association and are required to sign a code of conduct, and follow best practices for the treatment and counseling of seniors.
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