HUD just announced their high-cost limits for Alaska and Hawaii. Based on the fact that the Home Equity Conversion Mortgage (HECM) limits normally follow these States, we can safely guess that the HUD HECM limit for 2022 will also jump to $970,800 for all new applicants as of January 1, 2022 when HUD announces those changes in just a few weeks.
This is a very large increase for a single year, especially given the increases the program has seen over recent years. HUD limits are set based on a formula that takes into account the housing prices for the year, and according to Forbes magazine, some areas of the country experienced housing prices boosting increases of more than 30% last year over prices in 2020.
In September of 2021, the National Association of Realtors announced that home prices nationwide saw the biggest gain in the second quarter with an increase over the previous year of about 22%, and predicted a 14% increase overall from the year before by 2021’s year end.
How does the 2022 HECM Limit affect reverse mortgage borrowers?
If you own a home worth $822,375 or less, there are no new benefits for you. That was already the Maximum Claim Amount or Maximum Loan Limit for 2021 so nothing would change for those borrowers. The HECM lending limit is the maximum amount at which your property will still receive more reverse mortgage loan funds when calculating the amount of mortgage proceeds available under the program.
Under the 2021 limits, a borrower with a home worth more than $822,375 would receive no more money than someone with a home valued at the limit. So, a 62-year-old borrower with a home worth $1,000,000 would receive the same amount of money from the reverse mortgage as the same aged borrower with a home valued at the maximum benefit of $822,375. The new limit is not $1,000,000, but at $970,800, it will give these borrowers access to more money.
However, in January of 2022, when the new lending limit of $970,800 is expected to come into effect, homeowners with a $1,000,000 home (or more), will now receive substantially more money under the new limits than previous years. In high-cost areas like California where many houses are at or over $970,800, this can mean a lot more dollars available in the loan for homeowners. This is a big difference and a huge benefit for some – especially those looking to pay off an existing loan.
The graph we have illustrated for you below shows the difference between the amount a borrower would receive under the old lending limits and the 2022 limits based on a property valued at or above the maximum value. As you can see, borrowers can receive anywhere from $59,750 to $76,887 in additional funds based on today’s rates and a 2% margin. This might mean a higher amount available for the payoff of existing loans, higher monthly payments available, or a larger line of credit that grows on the unused portion of the loan monthly.
|AGE||2022 Limits ($970,800)||2021 Limits ($822,375)||Increase ($)|
While we do not advocate unnecessary refinances, for borrowers with home values greater than the 2021 lending limit of $822,375, this may be an opportunity to refinance under the new limits to obtain additional funds before rates rise and the increased rates make a refinance unavailable.
Rising Rates could all but cancel your 2022’s limit increase
The increase in interest rates can and will wipe out some or all of the additional funds available to borrowers if rates rise above the HUD floor of 3%. This is because interest rates are one of the components that also determine how much money you can receive from your reverse mortgage, and interest rate increases will make a significant difference in your available funds.
The HUD “floor rate” is 3% (the floor rate is the rate which if you are at or below, you will receive the most money for the program – below 3% will not get you any more money with your loan but rates above 3% will to give you less). For example, at the 2021 Maximum Principal Limit, at the HUD floor (which is where the market is very near or at now) a borrower would receive available Principal Limit proceeds of $430,925.
Our illustration above using a 2% margin shows the loan amount at $426,812 so that is very close to the HUD Floor. However, should the rate rise even 1% so that the rate is at 4%, the same borrower would receive just $386,516 or about $44,409 less due to the rate increase (numbers rounded).
Any higher increase to the interest rates and the loan amount would be even less. This holds true for first time HECM borrowers as well. The benefit of lower rates is not just confined to borrowers who are refinancing an existing reverse mortgage loan so if you are looking to receive the most possible funds or need them to pay off an existing loan, interest rate increases will lessen the amount of funds you receive with your reverse mortgage.
This means that the news for HECM borrowers with homes valued over $822,375 is very good, but it may come an expiration date should interest rates rise too quickly. HUD will make their formal announcement on 2022 lending limits later this month and the new loan limits will be effective with all applications on or after January 1, 2022 giving borrowers an opportunity to consider their options.
Those who are in a position to take advantage of the 2022 HECM limits can start some of the preliminary steps (counseling, etc.) before January 1st.