From our reader:
We have 2 homes, no mortgage. We do not need money at the present time. Could it be to our advantage to get reverse mortgage? Thank you for your help.
The question as to whether or not it could be to your advantage depends entirely upon you. I would not advocate having borrowers incur costs or take a loan they do not need for no reason, but there are things that HUD has indicated will change in the program this year and others that likely will change, that may make it worthwhile if you think you might want the loan sooner or later. Let’s talk about what we know.
HUD has announced that they will implement some sort of financial assessment this year. We do not know the exact parameters that will be put into place at this time, but what we do know is that not all borrowers that qualified for the Home Equity Conversion Mortgage (HECM or “Heck-um”) in the past will qualify once the financial assessment guidelines are in place.
When the announcement was first made, Met Life Bank attempted to get ahead of the curve by starting their financial assessment guidelines early and it was not a happy time for reverse mortgage borrowers. Many borrowers who once flew through underwriting were declined as they no longer met the underwriting credit and income requirements.
While we do not know if this bank’s attempt to implement the program early was more stringent that what HUD will ultimately put in place, what we do know is any tightening will mean that some borrowers no longer qualify either due to insufficient income or credit blemishes that are no longer acceptable.
Secondly, since 2009, we have been on a “temporary increase” in the HUD lending limit for HECM’s. The statutory limit is $417,000 and the temporary limit is $625,500. If your primary residence is not over $417,000 in value, a return to the old limit would not affect you.
If however your home is valued above $417,000 and you wait until the lending limit is back down to $417,000, then your available funds would be decreased (the amount of decrease would depend on how much over the $417,000 your value falls but at $625,500 or more, your funds would decrease by roughly 33%).
Again, there is no way to know if Congress will extend the current increase yet another time or not, but if they do not, then the lower limit will again be in place either on October 1, 2012 or at the end of the Calendar year 2012.
HUD has a program available known as the HECM Saver which can save borrowers thousands and even tens of thousands of dollars on closing costs. The Saver Program does not give borrowers as big a loan amount, but in recognition of the lower risk, HUD reduces the Up-Front Mortgage Insurance Premium to just a fraction of the Standard Program.
If you plan to get a reverse mortgage anyway and you fall into either of the two categories above (either limited income/credit issues or home value of over $417,000), then the adjustable rate Saver may be worth looking into. The line of credit can never be closed like a bank can with a HELOC and the unused portion of the line grows over time.
Let’s also talk about another category of borrower. You said you don’t really need the money right now so I would not advise this to you, but for those borrowers who really do need the money and would use all or substantially all of their benefit amount immediately, the fixed rate programs are an excellent opportunity for borrowers right now.
Rates are extremely low and due to the popularity of the programs among investors (those purchasing the underlying securities which are secured by the loans), lenders are able to offer many programs at this time where borrowers can receive credits to pay some if not all of their closing costs on the fixed rate loans.
So for those who have always heard about how expensive reverse mortgages are, between the Saver Programs and available Lender Credits, many borrowers are closing reverse mortgages with little or no closing costs. It’s still a loan and you still accrue interest, but if you are planning to do it anyway and again, especially if you think you may be adversely affected by financial assessment guidelines or lower value limits, there is no time better than the present.
So could it be to your advantage? Absolutely. Would I advise you to take out a loan just for the sake of taking out a loan? No I would not. You just need to take a look at your circumstances and make the decision that is right for you. Keep in mind that no one can say for sure what will happen or when but having a little knowledge about the current state of affairs and what is being proposed certainly can’t hurt you while you make your decision.