HECM Loan - Changing Loans and Fees
Editor's Note: In September 2013 the FHA announced huge changes in their Home Equity Conversion Mortgage (HECM) reverse mortgage rules. The changes are designed to shore up the FHA's losses and protect borrowers from taking reverse mortgages that endanger their financial situation. In order to help you understand the changes, read the two-part series about HECM loan changes in 2013, as follows:
- This article deals with changes in the amount of money available in the HECM loan program, including the overall loan size and the amount you can draw down during the first 12 months of the loan. These changes go into effect September 30, 2013.
- The second article deals with new requirements that the lender must make regarding checking the borrower’s credit and capability to maintain essential payments regarding the property. These changes will go into effect January 13, 2014.
After posting big losses in their reverse mortgage program, the FHA began in early 2013 to revise their reverse mortgage loan - the Home Equity Converter Mortgage (HECM). Their first step was to discontinue their most popular reverse mortgage loan: the fixed rate, lump-sum, standard HECM. The FHA pushed borrowers into HECM saver program, effectively reducing the amount of money you could borrow. In September, the FHA has announced even bigger changes.
Here are the major changes in the HECM loan that will go into effect for loans assigned on or after September 30, 2013:
- Overall loan amount is reduced
- First-year disbursement is reduced
- New Upfront Mortgage Insurance Fees
Change #1 to HECM – Overall Loan Amount is Reduced
One mistake many reverse mortgage borrowers made in the past was to take out too large of a lump sum and quickly deplete the equity in their home. A reverse mortgage is designed to help you stay in your home. It can be a handy way of increasing your cash flow, either by eliminating your mortgage payment and/or providing extra funds each month.
If you use the reverse mortgage in a risky or frivolous manner, then you may end up losing your home and all of your equity. Avoid spending the funds on extravagant vacations, paying off lots of debts, or trying to maintain your residence in a home you can't afford to maintain. This is especially true when housing prices are falling.
The FHA abolished the HECM Saver and HECM Standard. In order to determine the amount of money you can borrow under the new rules, the FHA has set up tables (they call them the Principal Limit Factor Tables), based on your age, and the initial/expected interest rate. The values are shown as a percentage of your property’s value. Here are a few examples from the new table:
source: HUD Principal Limit Factor Table - loans on or after 9/30/13
Example of new maximum allowable HECM loan (starting point): If your property is worth$200,000, the youngest borrower is 67 years old, and the expected interest rate is 5%, then you could borrow up to $110,200, which is 55.1% of the value of your property. If the youngest borrower was 77 years old and the expected interest rate is 8%, the you could only borrow 40% of the value of the property, or $80,000.
Change # 2 to HECM Loan - First Year Disbursement is Reduced
Before you shop for a HECM loan, you will need to take a good look at your financial situation. Make sure that you know your home's value, income, expenses, and debts. In order to make sure that you don't borrow to much of your home's equity, the new HECM rules limit the amount that is available to you during the first year of the loan.
To be a well-prepared borrower, familiarize yourself with some of the key terms you will come across when looking into an HECM loan:
"… disbursements at loan closing and/or during the First 12-Month Disbursement Period to the greater of 60% of the Principal Limit or sum of Mandatory Obligations plus 10% of the Principal Limit."
Here are some examples of the amount of money you can take under several different situations:
|Principal Limit||60%||Mandatory Obligations||Are Mandatory Obligations More than 60%?||If yes, then additional 10%||Repairs||Funds Available to Borrower||Total Amount Available in the First Year|
Remember, you can never go over the principal amount allowed in the first year. Make sure that you evaluate your choices and take the HECM loan in a manner that best fits your financial situation. You can choose to take the money as a lump sum, line of credit or term payment and tenure payment.
Change #3 to HECM – New Upfront Mortgage Insurance Fees
Along with the amount of money you can borrow, HUD changed the upfront Mortgage Insurance Premium (MIP). The initial MIP calculations are based on the amount of money the borrower elects to take during the first year. It can be either:
Reverse mortgages have many fees. Make sure that your lender explains to you all of the terms of your HECM loan, including the total amount you can borrow, the fees, and how and when you can receive your loan proceeds.
Here are some steps to take that will help you determine if a HECM reverse mortgage is the right loan for you:
- Prepare your budget. Pay special attention to all of your housing costs, including property taxes, property insurance, and household maintenance expenses.
- Check out with a real estate agent or an online site like Zillow, the approximate value of your home.
- Set out your monetary needs. Do you need money to repair the home, or make it appropriate for any special needs?
- Learn about how a reverse mortgage works. Make sure that a lender thoroughly explains you choices, the amounts of money available to you, and the fees you will have to pay.
- Be careful before taking a reverse mortgage. Don’t use the money frivolously. Take as little as possible up-front and don’t waste it on an extravagant vacation or a risky investment. Make sure that you will have funds available when you really need them.