The big news in mortgage lending effective this week has to do with rule changes by the FHA to their Home Equity Conversion Mortgage (or HECM – FHA’s version of a reverse mortgage) effective October 2nd 2017. Initially, many borrowers and loan officers were very concerned that the rule changes would raise costs and negatively impact borrowers across the board, but as the program changes have become better understood it’s clear that some senior reverse mortgage borrowers could actually benefit.
What are the Changes?
Effective Oct. 2, FHA will:
- Increase upfront MIP premiums to 2% for all borrowers. In the past, borrowers who took upfront lump-sum cash payments in excess of 60% of their loan proceeds paid 2.5%, while borrowers who took smaller payments paid just .5%. Now all borrowers will pay the same; those seeking larger sums of cash upfront are no longer being penalized and could actually pay less.
- Reduce annual MIP insurance premiums. Annual MIP will be lowered from 1.25% of the loan balance to .5%, lowering the total cost of borrowing. This will benefit nearly all HECM borrowers.
- Change principal limit factors, which will lower interest rates while also reducing the total amount of home equity that some homeowners can borrow against, while raising it for others. This part is a bit complicated, as principal limit factors determine the “maximum claim amount” (the maximum amount of cash available to draw), which depends on age of the borrower and the interest rate of the loan. Principal limit factors have increased for older borrowers, meaning they can borrow more, but have been reduced for the majority of younger borrowers. The “floor” for HECM interest rates has also been reduced from 5% to 3%, making the program more attractive to borrowers and lenders.
In general, these changes should have mixed results for borrowers.
Borrowers who take more than 60% of their maximum claim amount as an upfront lump sum payment will benefit. The program no longer incentivizes those who take payments over time: upfront borrowing costs will go up for all borrowers except those that take out larger lump sum.
Most HECM borrowers will benefit from the reduction in ongoing loan costs. Over the life of the loan, the total loan cost will be lower than under the previous structure.
The FHA itself also benefits: The changes will likely cause more HECM borrowers to choose the upfront payment option rather than home equity line of credit or monthly payment options, meeting the FHA’s goal of lowering their ongoing administration costs for these loans.
Lenders and some home sellers might also benefit: There will more demand for these loans, given reduction in the MIP and floor interest rate; that means more competition among lenders to provide these loans at lower rates. Demand for real estate could also be affected in some markets like Phoenix Valley that are attractive to retirees, since lower rates and the ability to borrow a larger upfront lump sum could simulate demand for HECM purchase loans.
In short, if you are a retiree considering a reverse mortgage that will allow you to age in place or if you’re considering using the HECM for purchase program to buy a new home – or have a client who is – these program changes could be to your benefit. Contact The Mortgage Brothers Team today to learn more about Reverse Mortgages.