If you have been thinking about establishing an expanding line of credit on your primary residence (aka Home Equity Conversion Mortgage), now is the time to do it! The rules will change on October 2nd resulting in a substantial increase in associated upfront costs.
This announcement was unexpectedly declared on August 29th by the U. S. Department of Housing and Urban Development (HUD). “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,” said the HUD’s Secretary, Ben Carson.
Secretary Carson is referring to the fact that the Federal Housing Administration (FHA), which administers the reverse mortgage program, covers the losses on these mortgages from a reserve fund that is paid for largely by premiums from younger borrowers on traditional FHA mortgages. The reverse mortgage program has taken nearly $12 billion from that reserve fund since 2009, and in 2013, the FHA required a $1.7 billion Treasury appropriation to help cover losses.
Since the reverse mortgage program is backed by taxpayers, the HUD wanted to make some changes to ensure better overall financial health for the program.
What’s changing and who does this affect?
- The Mutual Mortgage Insurance Fund (MIP) will have an upfront 2% fee of the appraised value of the residence and NOT the amount withdrawn. For example, if your house appraises for $600k and you are drawing a $300k line of credit, this 2% fee will apply to the appraised cost of your home versus the amount you want to draw. This will substantially increase the cost to establish a line of credit.
- The MIP is reduced for those who are already drawing on the line of credit from 1.25% to 0.50% on the amount that is borrowed, so this will actually be reduced from the current standard.
- The maximum borrow limit calculation is also being reduced, but information on what that new limit will be and when it will take affect has not been announced.
- These changes will affect all new borrowers starting October 2nd.
- These changes WILL NOT affect anyone with a current reverse mortgage as they are grandfathered in to the program.
The HECM is a wonderful financial/investment planning tool. Many of our clients have had the opportunity to establish one for their primary residence and fortunately they are grandfathered in their HECM. If you’ve been thinking about a HECM, now is the time to do it. If you need more information on whether a HECM is right for you, please contact us now to take advantage of the current HECM requirements before they change.
Rob O’Dell, CFP®, serves clients in our Naples, FL office. With more than 20 years of personal financial planning experience, Rob knows that successful financial planning involves a distinct process, not a one-time event.
Rob has been featured in the Wall Street Journal, Financial Planning Magazine, The Daily Herald and Money Magazine. He was a contributing author on the Third Edition of the Florida Domicile Handbook. Learn more about Rob O’Dell.
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 Kusisto, Laura (2017, August 29). Trump Administration Plans New Restrictions on Reverse Mortgages. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/trump-administration-plans-new-restrictions-on-reverse-mortgages-1504015496