It’s been a busy week for the world of reverse mortgages, if news coverage is anything to judge by. The LA Times, Forbes, and several others have been writing at length about reverse mortgages. Some of it with critical opinion, some of it reporting on shakeups that could be coming to the policies governing reverse mortgages. All of them show that the traditional conventional wisdom about reverse mortgages might be shifting, though, so we’re going to take a look at some of the coverage and the impacts the news might have in a wider context.
Reverse Mortgages No Good?
The LA Times piece, titled “Reverse mortgages have gotten safer and cheaper but aren’t for everyone,” doesn’t mince words:
“Reverse mortgages have gotten safer and less expensive but they aren’t a good short-term solution for anyone. All mortgages have costs, and it makes little sense to pay to set up a reverse mortgage if you plan to get rid of it a few months later.”
While at first it might seem that the takeaway is that reverse mortgages are to be avoided, a more careful examination of the article shows that weighing your options is always the first recommendation in situations where reverse mortgages might be applicable, and that there are some scenarios where they make sense.
While it’s true that reverse mortgages make it difficult to change the terms of a loan once it closes, and they might not be the best option for multiple generations of the same family living together (as the loan cannot be assumed by a family member), the fact that reverse mortgages are seen as safer than they were in the past is a big positive.
The reason for the change? Greater understanding about how they work and smarter choices about how they should be applied have changed the perception that individuals have about reverse mortgages. The fact that they have served as a boon to older individuals who might not have the necessary retirement funds saved up to carry them through their basic expenses, has also worked on correcting the perception of this often misunderstood form of borrowing.
Mortgage Rules Changing
The second bit of news has to do with the government changing the way that reverse mortgages will work. From the Forbes article:
“The Trump administration just announced new policies taking effect Oct. 2 that will increase the upfront cost of reverse mortgages for many borrowers and reduce the size of the loans.”
Just what will these new rules entail? The article delves into further detail, and here are a few highlights from what has been announced.
- The new limits on the total amount you can borrow will shift from 64% of home equity to 58% of home equity.
- Upfront mortgage insurance premium costs will increase from 0.5% to 2% of the maximum claim amount.
- Upfront premium costs will drop for those taking out more than 60% of their loan upfront, from 2.5% to 2.0% of that maximum.
- Annual mortgage insurance premiums will also drop, from 1.25% to 0.5% overall.
The reason for the changes? The government says it’s to make the reverse mortgage program more viable. Last year, the value of the reverse mortgage program was “negative $7.7 billion,” says the US Department of Housing and Urban Development. A press release issued along with the announcement of the proposed changes claimed that it could “no longer remain viable in its present form.”
The effects could be wide-reaching, assuming they take place with no alterations. Though there are plenty in the industry trying to get the government to reconsider before the deadline, if things go as planned, lenders profit margins might decrease, which will have a direct effect on borrowers as well.
Gone will be the subsidized closing costs and similar deals which make the burden of processing these loans more manageable. Costs for just about every aspect of reverse mortgages could go up, while the borrowing power for the average consumer might stagnate or even decrease. The practice of creating reverse mortgage lines of credit as a backup strategy for retirees might also see as sharp decline, and the gains that were changing perceptions about reverse mortgages might be erased.
Borrowers and potential borrowers should stay informed. Keeping up to date on the story, finding out more on how the proposed changes will ripple throughout the industry, and staying current on mortgage rates and similar information through sources like mortgageloans.co will be critical to navigating all the possible shakeups.