Posted on March 25th, 2010
Reverse Mortgage News, 5 Improvements Benefitting Homeowners
1. Increased lending limits, which allows higher home values access to more equity
2. Fixed rate reverse mortgages are providing additional options to homeowners
3. Reduced closing costs as HUD reorganizes how loan origination fees are calculated
4. Reduced servicing fees, which enables the reverse mortgage to open up more equity
5. Increased competition, more public awareness, and the easy access to information provided by the internet is allowing those interested in a reverse mortgage to find companies offering the best service at the best price.
Since the inception of the Federally-Insured reverse mortgage programs (known as the Home Equity Conversion Mortgage or HECM & insured by HUD, the Housing & Urban Development) in the late 1980’s, we have not had a period of time where so many positive improvements have been made to reverse mortgages in such a short amount of time. We have recently witnessed lending limits rise, low fixed rate reverse mortgage offerings, reduced origination fees, reduced servicing fees, and a combination of competition, public awareness, and the internet allow those interested in a reverse mortgage to find companies offering the best service at the best price.
Reverse mortgage lending limits have incrementally increased over the years, but we saw our biggest increases within the last couple of years as the limit rose to a high of $625,500 & is slated to stay this high for the remainder of 2010. In summary, it took the program approximately 19 years to reach $362,790 in higher cost of living areas whereas it has taken less than 2 years for the limit to rise as high as $625,500 & be applicable to all living areas. A lending limit is simply a cap on the home value. When calculating how much equity a reverse mortgage will make available, HUD will use the lesser of the home value or the lending limit. To fully understand how the monies available are calculated, please read our discussion located at How Much You Qualify For.
Again, the last couple years have been good times for reverse mortgages, as the fixed rate reverse mortgage has become a reality. Historically, the Federally-Insured reverse mortgage programs available came with an adjustable rate. The options under the adjustable rate would allow for either a monthly or annual adjustment. The monthly adjustable reverse mortgage has been and still is more popular than the annual adjustable because the lender’s margin added to the rate is considerably lower. In the early stages of this product there were limited options, but now we have a fixed rate of 5.5%. A fixed rate reverse mortgage at 5.5% is unique as it will always maximize the amount of equity available under HUD’s current formula (please refer to link in previous paragraph for further explanation of HUD’s formula).
Another recent benefit to reverse mortgages comes in the form of a cost savings to the consumer. HUD issued amendments to their program, which reduced the origination fees. Historically, the origination fees were identical to the HUD insurance premium; however, today they are calculated as 2% of the first $200,000 and 1% of the amount exceeding $200,000 with a cap of $6,000. Origination fees cover the cost of marketing, underwriting, personnel and overhead. Recent developments have allowed the origination fees to offset the discount the loan may require when sold to an investor, which is good news for the borrower as they will receive a lower rate and more funds available.
After the reduction in the origination fees, along came a drop in the servicing fees from $35 a month down to $20-$25 a month depending upon product (for more discussion about servicing fees, please go to Reverse Mortgage Costs). This reduction not only saves money for the borrower but adds to the amount of equity available, a win-win for the consumer. The next positive step is on the horizon. Servicing fees are dropping below $20 a month for the first time in history and will possibly be as low as zero for some reverse mortgage programs.
The fifth recent benefit to reverse mortgages relates to the impact of competition, public awareness, and the internet, all of which help educate the families looking into these programs. A more knowledgeable consumer will find the right reverse mortgage for their situation at the best price from a specialized company. Proposed Congressional and State legislation will further contribute to the public awareness about reverse mortgages. The end result, reverse mortgage programs have made lots of positive progress in a short span of time. The recent downturns in the economy have impacted reverse mortgages but have also provided an environment for them to develop and mature for the better.
Posted on March 8th, 2010
When you are considering a reverse mortgage, your interest rate will be a significant part of the decision. There are pros and cons for both a fixed and adjustable. I will get into breaking down the differences to help you understand how the rates are determined, the options for borrowing your money, and prepayment differences.
Interest rates, whether fixed or adjustable, will impact you in 2 ways. First, it will determine how much the loan will cost you. Second, it will be used in calculating how much you qualify for. You can go to our page on reverse mortgage interest rates to get a more detailed breakdown of the rates involved.
When considering the costs of a reverse mortgage it is important to evaluate the interest rates and how they will impact your situation. Besides interest rates, you also need to consider servicing fees and closing costs. All three of these factors need to be analyzed when considering the costs of a reverse mortgage. Here In this blog, we are only going to discuss interest rates.
The biggest difference with interest rates will be whether you choose a fixed rate or adjustable rate reverse mortgage. Fixed rate reverse mortgages do require you to borrow 100% of the proceeds at closing. If you are not paying off a large mortgage, or have an immediate need for the monies, this may not be the best option for you. If someone is encouraging you to invest the monies, we strongly urge you to walk away. This is not a good investment. If there is additional money you are required to pull out you may want to consider a CD or Money Market to offset a small portion of the interest. You should also contact a tax advisor as any interest earned could have tax implications.
If you do not have to pull the majority of the monies out, then you are more likely better off with an adjustable rate reverse mortgage. This would allow you to only take what you need when you need it. Interest will only accrue on the monies you stick in your pocket. The unused monies can be set aside in a Line of Credit or used as a Monthly Advance. This will give you a lot more flexibility in how you use your monies available.
The last thing I would like to cover is the ability to partial pre-pay a reverse mortgage. You need to understand a fixed rate reverse mortgage is a closed-end mortgage and an adjustable rate reverse mortgage is an open-end mortgage. If you make partial prepayments to a fixed rate reverse mortgage, you will not be able to access those monies in the future. Yes, it will pay down your loan balance, but those monies will not be able to be accessed.
An adjustable rate reverse mortgage is an open-end mortgage. If you decide to make partial prepayment s, it will pay down your existing loan balance and will also make those monies available to you in your Line of Credit. This is a great feature in the event you are required to draw down your minimum distributions in tax deferred investments. It allows you to pay down your loan balance, while not losing access to those monies in the future. We encourage you to work with your financial planner when considering this option. We work with many planners implementing such strategies, which help to maximize your liquidity and make your monies last as long as possible.
Interest rates are only one consideration when deciding which options are best, and we will get into further discussions of other costs to consider when choosing a reverse mortgage in future blog posts. Thank you for reading our discussion on fixed or adjustable rate with a Massachusetts reverse mortgage.