October 2, 2017 will be remembered in the HECM world as the day major changes to the HECM product took effect. It is one of the most comprehensive changes to the program in recent years. Specifically, there were three major changes that occurred.
First was the lowering of the interest rate floor. The ramifications of this are still not fully determined and won’t be for several months. On the surface you would think, lower rates, better for the consumer, where is the downside? While not really a downside, the floor, or minimum interest rate HUD now allows is actually so low that basically a lender can’t offer it. They wouldn’t and couldn’t make enough money to even do the loan. On the high side of the interest rate spectrum, the rate is now almost too high. And if a loan were somehow taken out at this higher interest rate, there would be the risk of it being re-financed, and that is something the lender does not want. Nor would a borrower want to pay an excessively high interest rate!
This interest rate conversation ties right in with the next change HUD made, the decreasing the Principal Limit Factor (PLF). The PLF is the maximum percentage of equity you can get from your home with your reverse mortgage. And HUD just tightened this belt by about 20%. Now senior homeowners will be able to tap into less of their equity but they will pay a lower interest rate on the money they get.
The third major change in this piece of legislation is the mortgage insurance premium charged. The HECM product has two ways you pay for mortgage insurance; up front, at the time of closing and then an annual premium that accrues on your balance monthly. The new rate is 2% up front, or what HUD calls the Initial Mortgage Insurance Premium (IMIP). It was 2.5% if you took out more than 60% of the eligible funds and one-half of one percent for 60% or less. The annual premium was 1.25% and as of October 2nd, HUD decreased that rate to .5% (one-half of one percent).
Are the changes good or bad. Yes and no. Whether the change is good or bad is determined by what the borrower needs the HECM for. A couple of examples; If an existing first mortgage is being paid off and it takes most all of the available funds from the HECM to do it, the changes are a good thing. As the IMIP, annual mortgage interest rate and the interest rate, are all lower. If a small mortgage is being paid off, not so good as the interest rate and annual mortgage insurance are lower but the IMIP is higher. And the “sweet spot” with the changes is a senior borrower purchasing a home with a reverse mortgage!
These changes make working with a qualified reverse mortgage specialist critical! If you have any questions, would like to meet for a cup of coffee to know more, or want me to present to a group of people, I am available, just contact me to schedule a time.