Many people who applied for a reverse mortgage sometime in the past but then applied again over the last year were surprised to see that when they looked at the numbers again, they received a lot less money now. For some, the difference was so great that even though the past figures allowed them enough to repay the existing mortgage on the home, the new amount available to them was not even sufficient to pay off the balance of the existing loan.
This left borrowers frustrated and, in some cases, frantic since they thought that all they had to do the last time was wait for the house to go up a little higher in value, HUD to raise the lending limit a little more or to get a little older making them eligible for more under the program. We have always cautioned people against this philosophy because higher interest rates can melt away available proceeds much faster and in larger amounts than a little extra age can add them to your eligibility.
What can borrowers do now?
Well, you still have options if you were short to close the last time you got a quote for a reverse mortgage.
Get another one now. Rates have taken a dip downward and suddenly borrowers are getting more money on their quotes. The expected rate is locked for 120 days from the date of application so if you see that you qualify for the amount you need, you can apply online and lock in your expected rate which is the rate that determines the amount of money you receive at closing.
The program also allows for a one-time float down of the expected rate at closing so if the rates continue to go down, you may get even more money at that time. If they go back up, your Principal Limit (the amount of money you will receive) as a percentage of your appraised value is locked at the higher rate and will not go down even if the rates rise.
Option #1 – Pay Down Your Loan Balance
You can always pay down your existing balance on the current mortgage. I have had people ask me why they would want to do this. Just think, with the lower rates now, if you have a very small shortfall (your reverse mortgage balance is just a little lower than the amount needed to pay off the existing mortgage), then you can take money out of a bank account and pay down the mortgage balance to close the reverse mortgage. With that mortgage payment eliminated, you would have a much better chance to replenish your savings.
Any money you pay down on the existing loan is being paid to the equity in your home, not to someone else. It is for your benefit. If you have a balance on your home of $100,000 and you need to take $10,000 out of the bank to lower your mortgage amount to $90,000, the equity remains in your home, and you accrue less interest on the new loan as a result. You are the only one who benefits by the reduction of the loan.]
#2 – Receive gift funds from a family member
You can use a gift from a family member to reduce the principal balance on your loan if that is an option. Many families have determined that it is easier and less expensive overall to gift money to a relative who needs it to remain in place than to pay to move them if they cannot afford to remain in their home without the benefit of the reverse mortgage. The funds must be a gift, not a loan. (View HUD rules on gift funds here.) Most of the time the family members are heirs and receive the benefit of the equity in the home anyway but that is between you and your family members. There can be no agreement to repay the loan or payment arrangement.
#3 – Sell other assets to raise funds for the shortfall
Some seniors have determined that it was better to sell assets to raise funds to pay for the shortfall. Again, that shortfall is likely to be lower now with rates easing in the recent weeks but when you think about it, most of us keep many things around us that have some significant value that we do not need or in many cases even use anymore.
If you have assets that you know you will never use and you are like me, you don’t think your family may even necessarily want or use later, why not consider selling them now and using the proceeds for something worthwhile (like keeping your home and not having to make a monthly mortgage payment)? This is not feasible or even possible for everyone but something that people often overlook.
#4 – Downsize using the reverse mortgage for home purchase
Another area that people do not consider but it might be the best option for many is to downsize and use a purchase reverse mortgage to buy a home with the HECM for purchase program. Many borrowers find that they can purchase a home that might even be more acceptable for their current needs but never considered it. For example, the home you are in may be too large, too far from family or needed services. Your current home may be two stories or have too much land. Perhaps you would be better off with one that is situated better for a senior homeowner.
If any of these are true, you may benefit greatly from speaking with a senior real estate specialist to see what options are available in the area that would be your preference and then check both the amount you would likely receive from the sale of your home and the amount you would need for the purchase of a new (or new to you) home in the new area. Perhaps you were short to close in your current location but may be just right in the new spot.
#5 – Wait it out
And you can always wait until you are older and check back as many have done. As I stated earlier, we do not recommend this approach as much because too much can happen when you just wait. HUD rules can change. Interest rates can rise. You just never know. Sometimes waiting can be in your favor. For example, HUD just raised its maximum lending limit again and starting on January 1, 2023, the limit rises above $1,000,000 for the first time ever to $1,089,300.
And under the program, the older you are the more money you receive. The problem with waiting though is the unknown. If you wait and nothing changes, depending on interest rates you will get a little more money for every year you are older (about $4,000 on a $700,000 home) but if the rates go up just .25% you get about $10,000 less available loan amount.
As you can see, at a time when the Fed is raising interest rates at .50% to .75% a shot and there have been 5 such increases in 2022 (and one .25% hike), even though the rates for reverse mortgages are not directly tied to the Federal Reserve rate they are influenced by them, and reverse mortgage rates have risen sharply in 2022.
Borrowers have seen their available mortgage balances decrease in some cases by over $100,000. And since borrowers have the option to lower their expected rate with a one-time float down at closing taking advantage of recent rate reductions, waiting for interest rates to decline is not the method we recommend most borrowers employ. But it is an option.
We recommend that borrowers visit our calculator to see how their numbers may have changed recently. As stated, homeowners with homes valued above the 2022 limit of $970,800 combined with recent reductions in rates may receive enough with the new parameters to eliminate old shortfalls.
Perhaps that will be enough for some to have a Happy New Year in 2023.
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