HECM’s are not your grandfather’s reverse mortgage, but rules are changing for this increasingly popular financial tool!
- The rules surrounding reverse mortgages changed on October 2, 2017.
- After October 2nd, it will become more expensive for many borrowers to use reverse mortgages as a financial reserve or to provide monthly income.
- When evaluating a reverse mortgage, decide what’s more important: to maintain a comfortable standard of living or to pass your home to your heirs.
Interview with Nicholas S. Maningas, Sr., Manager of Reverse Mortgage Lending, Gateway Mortgage Group, LLC
Effective October 2, 2017, the government changed Home Equity Conversion Mortgages (HECMs) to ensure that the benefits provided under this type of reverse mortgage will be paid in the future.
INDEPENDENCE ADVISORS: Nick, who is making these changes to reverse mortgages?
NICK MANINGAS: The Federal Housing Authority (FHA), part of the Department of Housing and Urban Development. The FHA provides mortgage insurance for Home Equity Conversion Mortgages made by FHA-approved lenders throughout the U.S.
IA: Why is the government changing the rules on reverse mortgages?
NM: These changes are intended to strengthen the financial integrity of the mortgage insurance pool that guarantees payments to borrowers of the reverse mortgage benefits. If you currently have a HECM loan, don’t worry, understand that the October 2nd changes will not change the terms and/or provisions of your current loan. Everything will continue as it has in the past.
IA: How is a HECM different from a reverse mortgage?
NM: The HECM (Home Equity Conversion Mortgage) is a reverse mortgage that is insured by FHA. There are proprietary or private reverse mortgages that are not insured by FHA. These proprietary loans are for high-value homes typically $3 – $10 million in value.
IA: Are all homeowners eligible to obtain HECMs?
NM: To be eligible for a HECM loan, borrowers:
- Must be age 62 or older, if a spouse is under 62 they would be considered as a non-borrowing spouse and the borrower would be the spouse 62 or older;
- Must own their home and any existing mortgage must be refinanced with the HECM;
- The home must be their primary residence;
- All borrowers must meet financial assessment requirements.
IA: Suppose you’ve been toying with the idea of a reverse mortgage, how will these changes affect the cost and benefits of the reverse mortgage?
NM: After Oct 2nd, the changes to reverse mortgages will affect many borrowers. For instance, borrowers that intend to use a reverse mortgage as a financial reserve will find that their financed upfront premium for mortgage insurance will go up substantially. Borrowers looking to refinance their current mortgage with a high balance may find that they will be unable to do so. This is because the principal loan factors that determine the amount of the loan will decrease therefore there will be less available to pay off an existing mortgage.
IA: So, is it still worth pursuing a HECM if you miss the October 2nd deadline?
NM: The good news is that the ongoing premium based on the loan balance has also been reduced, thus preserving the borrower’s equity over time. Even after the changes are implemented, reverse mortgages will still be a viable solution for many retirees who need income; who want to refinance their existing mortgage and eliminate the payment; purchase a retirement home or by simply following the terms of the HECM guarantee that they’ll have access to the equity of what might be their most valuable asset–their home.
IA: How do aging homeowners know if HECM’s or other types of reverse mortgages are right for them?
NM: When evaluating the pros and cons of a reverse mortgage, one of the first things you must consider is what’s more important to maintain a comfortable standard of living that you are accustomed to or to pass on more of your assets in the form of your home to your heirs. As with many retirees, they spend their assets to live, with a reverse mortgage you will “spend” your home equity to stay at home. If your goal is for your children to inherit your home, then maybe a reverse mortgage is not for you. If that is not your goal, then consider a reverse mortgage to be a part of your retirement asset distribution plan.
IA: Do you think the growth of HECM’s will continue as our population ages?
NM: Yes. With no out of pocket principal and interest payments left to make; or receiving a monthly income; or having additional financial reserves, aging homeowners will enjoy the peace of mind that comes with knowing they will be able to stay in their homes for as long as they like–which is often the rest of their lives. Keep in mind that like other homeowners they will be responsible to pay their property taxes, insurance, repairs and other expenses related to homeownership.
IA: So, you essentially have no mortgage payments with a reverse mortgage? Sounds great!
NM: Again, you no longer pay principal and interest as you would under a typical mortgage. However, you are still responsible for property charges, taxes, insurance, and repairs to keep your home in reasonably good condition. The October 2nd changes are necessary so that those who have HECMs today and those obtaining HECMs in the future will be guaranteed their benefits from the reverse mortgage.