Almost one year ago, HUD announced changes to the Home Equity Conversion Mortgage (HECM) for seniors sixty-two years and older that was a bit of a mixed bag. For borrowers, the changes boiled down to a decrease in the amount of equity they could access, but, HUD reasoned, with the upside of possibly keeping more of the equity in their home in the long run.
As a result of HUD’s belt-tightening move, new private lenders have recently entered the reverse market space with proprietary reverse mortgage products to cater to the needs of a wider array of homeowners. These new products provide potential opportunities for different types of homeowners and borrowers. Also, new lenders competing for borrowers has in some cases resulted in better, more “user-friendly” products at better prices for homeowners. Competition can be a good thing.
Perhaps the most surprising change is that there is now a proprietary reverse mortgage available for people as young as 60 years old, while the HECM age qualification remains at sixty-two years of age. This “sixty is the new sixty-two” may appeal to people looking to retire sooner rather than later.
Some folks don’t like the sticker price of the traditional, FHA-insured HECM. Good news here too. Thanks to private lenders, we now have other reverse mortgage products with competitive pricing. For example, one product costs only $125 (to pay for required reverse mortgage counseling) plus cost of their home appraisal. With this product, the cost of appraisal and all other related loan costs are credited at closing. While lower closing costs certainly sound appealing, a closer look reveals that some of these loans offer reduced lending limits and higher interest rates than the HECM. So it may be a bit of a trade-off and it is best to explore all of your options.
Good news for condominium owners seeking a reverse mortgage. While HUD still requires condos to be FHA approved to qualify for the FHA-insured HECM, new lenders are offering “spot approval” for condos. This means being able to bypass the time and cost of seeking FHA approval for the condominium complex, which might feel like a headache that some condo owners (and their HOAs) don’t want to deal with. Currently some lenders are offering spot approval at no cost, a further bonus for condo owners seeking a reverse mortgage.
All of the reverse mortgage products can be considered and may meet the needs of homeowners looking for alternatives to traditional home equity lines of credit (HELOCS) to pay for needed home repairs, etc., but without the burden of having to make monthly mortgage payments. Note: with all reverse mortgages, homeowners must continue to pay property taxes, homeowner’s insurance (including flood insurance if you are in a flood zone), HOA fees, and maintain their home.
An often unknown or overlooked feature of most reverse mortgages is that seniors’ benefits may also be used to purchase a home. This may increase the buying power of older adults seeking to move or downsize. In this program, the home buyer needs to come in with over half of the purchase price in cash (after a downsize, for example) and the remaining portion of the purchase cost would come from the reverse mortgage. The big advantage here is that the homeowner(s) will not have monthly mortgage payments on their new home. But again, they must plan to pay their property taxes and homeowners insurance.
Some lenders are also offering “jumbo” reverse mortgages for higher-priced homes. While the HECM currently looks at a maximum home value of $679,650, jumbo lenders will look at the entire home value with a maximum loan limit typically at four million dollars. Considering the average home price in Santa Cruz county is about $850,000, jumbo loans may be a much better fit for homeowners with homes appraised at $750,000 or higher. Jumbo reverse mortgages offer fixed interest rates with a lump-sum draw. There is a “flex jumbo” program that offers homeowners the option of partial lump-sum draw along with monthly payments for a fixed term up to five years.
For those seeking a line of credit that grows over time and/or monthly income checks for life, the traditional HECM is still the only game in town.