MN Reverse Mortgages - Reverse Mortgages SIDAC -What's New with Reverse Mortgages Archives

During the last year more than ever before the reverse mortgage industry saw changes. There are now some programs with different interest rates options. These are only applicable for new loans.

Previously the HECM interest rate was only available based on the 1-year U.S. Treasury Rate (CMT) plus a margin. Until late 2007 the only margin option was 1.5 points. In other words if the 1-year Treasure was 4.57, the interest would be 6.07 (4.57 + 1.50). In 2007 the funding lenders added some new options and a lower margin of 1.25. So if the Treasury Rate is 4.57 the interest rate would be 5.82 (4.57 + 1.25). (Note: Because of the market changes, the lower margins are not available at this time and margins can rage up to 3.25%. 1/09)

The LIBOR (London Inter-Bank Offertory Rate) is another rate option now available on the HECM. This rate is becoming more common than the U.S. Treasury Rate. Analysis of fifteen years of interest indicates that the LIBOR rate averages less than the Treasury rate. The LIBOR program, like the CMT, uses an initial rate and an expected rate (used to determine how much will be loaned). (Note: LIBOR is now only offered on a limited basis at this time. 6/08)

A HECM Fixed Rate is now available. Until early 2008 the only option was adjustable rates, either monthly or annual. The most common was the monthly adjustable and this remains the most common. While a fixed rate sounds enticing, once it is understood, it is seldom the best choice for a reverse mortgage. This is because the interest rate is higher initially and less funds are available than with the more common monthly adjustable rate. The lowest fixed rate is available when all the funds are drawn up front – the rate is much higher for the monthly payment or line of credit fixed rate options.

Another disadvantage with the Fixed Rate is interest is being accrued on all funds drawn up front when it may not be necessary to take all the funds initially. Additionally, the growth rate is not available on the funds in the line of credit on the Fixed Rate program.

The Monthly Adjustable Rate using the CMT has averaged 6.78% over the last 15 years (based on a lower margin than now available 1/09). The LIBOR rate has average 6.09% over the last 15 years. This means in the big picture, the Monthly Adjustable LIBOR program costs less. Click here for this week's interest rates.

During 2007 more proprietary (private) programs became available offering more options for larger valued homes. More will likely become available in 2008 also. Their various options need to be reviewed to determine which program will be the most advantageous to a borrower.

Reverse Mortgages in Legislation
(Winter 2007-2008)

Congress passed legislation in 2007 that included HUD reverse mortgages. Called the FHA Modernization Bill, the legislation includes a national lending limit of $417,000 (vs the lending limits by county) and a home purchase program. There are some difference between what was passed in the House of Representatives and what was passed in the Senate. These differences need to be worked out and then signed by President Bush. After this HUD will need to set their guidelines before the changes can be implemented. (This is not expected to go into affect until at least 3rd quarter 2008.)

Some other areas that are being reviewed and may see some regulations include:

Counseling, which has been free, may in the near future have the counseling session fees paid by borrowers. We are awaiting HUD’s guidelines on this. Counseling agencies are already starting to charge lenders for borrower's counseling sessions. The quality and consistency of the counseling is also a concern and being looked into.
Companies who sell both annuities and reverse mortgages – Reverse mortgages and any financial planning should be done by separate companies; annuities are not required to be purchased with reverse mortgage proceeds. Note: We have always believed this, unfortunately there are some companies who do not keep financial planning or selling annuities and reverse mortgage transactions separate. This is why we specialize in reverse mortgages and leave the financial planning to the experts in that area.
Misleading direct mail from lenders that looks like government notices – Although the reverse mortgage is insured by HUD, a government agency, HUD does not do direct mail or the lending.

New Rates for HECM Reverse Mortgages

The HUD Home Equity Conversion Mortgage (HECM) has more options with reduced interest rates on the monthly adjustable rate products making more funds available to borrowers. The 3 options include: The HECM 150, HECM 100, and HECM Advantage.

The HECM 150 is the product we have been offering - this interest rate is based on the Treasury Rate plus a margin of 150 basis points.
The HECM 100 is a new product based on the Treasury Rate plus a margin of 100 basis points. The lower margin increases the Principal Limit or loan amount. (Note: This program is no longer available. 1/08)
The HECM Advantage is another new product also based on the Treasury Rate plus a margin which is adjusted each week. This rate is lower than the HECM 150 and targets the Principal Limit to be the same as the HECM 100, however, in most cases more cash will be available, with a higher line of credit growth rate, and higher monthly payments than the HECM 100. (Note: This program is no longer available. 10/07)

The Principal Limit Protection feature, implemented in 2006, is offered on all HECM products.

How the funds will be received and utilized will be the factors used to determine which product is right for your situation. Reverse Mortgages SIDAC, The Experts Excelling in Service, will work with you, providing calculations, amortization schedules, and comparisons to review and determine which product is best for your situation. Give us a call for more information or clarification on the reverse mortgage products and to see which program will best suit your needs.

Changes in The Reverse Mortgage Industry

Within the next year we will be seeing many changes in the reverse mortgage industry. Some may be happening as early as February 2007. Check back here, on the Reverse Mortgages SIDAC website, to learn more about these changes as they happen. If you have questions on what you have heard or read about might be happening, give us a call to learn the facts and discuss the details.

Twin Cities Metro Counties Have HECM
Lending Limit Increase

Effective January 28, 2007 the FHA Lending Limits in the Twin Cities Metro were increased from $251,750 to $276,683. However, the national lending limits did not change for 2007.

FHA’s Lending Limits are based on the county in which one lives. The base and high limits are: $200,160 and $362,790. In Minnesota, the Lending Limits are $200,160 except for the following counties where now they are:

Anoka $276,683
Carver $276,683
Chisago $276,683
Dakota $276,683
Hennepin $276,683
Isanti $276,683
Ramsey $276,683
Scott $276,683
Sherburne $276,683
Washington $276,683
Wright $276,683

To determine the loan amount on the FHA HECM (Home Equity Conversion Mortgage), the lending limit or home value, whichever is lower, is used. For example, the value of one's home may be $500,000 but FHA will use the Lending Limit of $200,160 (rural counties) or $276,683 (metro counties) to calculate the loan amount for a FHA HECM.

FHA Approves Principal Limit Protection/Rate Lock-in

July 18,2005 brought the long awaited approval of the Rate Lock-in for HECM Reverse Mortgages. Also called, Principal Limit Protection, this new HUD policy reduces some of the uncertainty of the loan amount between the time of application and the closing date.

To understand the value of this, you need to know how the loan amount is determined: The loan amount, or Principal Limit, of a Reverse Mortgage is determined by the age of the youngest borrower, the home value or FHA lending limit, and the Expected Interest Rate. The Expected Interest Rate is based on the 10-year U.S. Treasury Bill and changes weekly for calculation purposes. Prior to the rate lock-in, the Principal Limit could not be determined until the week of closing because the Expected Interest Rate changed weekly.

Now with the new policy, when the borrower closes, the Principal Limit can be calculated using the Expected Interest Rate at the time of application or at closing, whichever is lower. Sometimes the rate can change enough between the time of application until closing making a several thousand dollar difference in funds available to the borrower(s). Then, sometimes, at the time of closing we would find there wouldn’t be enough proceeds to achieve the goals of the borrower(s), such as using the reverse mortgage to pay off current liens.

For example: On a $230,000 home for a 73 year old borrower, if the Expected Interest at the time of application is 5.59%, the Principal Limit is $161,690. If at the time of closing the Expected rate is 5.74%, the Principal Limit would be $158,630. In this example, the rate at the time of application would be used making $3,060 more available to the borrower.

Now, we don’t have to wait until closing to determine if there will be enough funds. If there are enough proceeds at the time of the application, we can have an assurance that if the actual appraised value of the home is the same, or greater, as the estimate used at the time of application, the Principal Limit will be protected. The borrower will receive the higher maximum amount available.

The catch is the loan needs to be closed within 60 days from the date the FHA Case Number is assigned. This number is needed to order the FHA Appraisal needed to do a reverse mortgage. If the loan is closed on day 61, the Expected Rate at the time of closing would be used. It is important borrowers work with a lender, such as Reverse Mortgages SIDAC, that have the knowledge, experience, and reputation of processing reverse mortgage loans in 30 to 45 days.

FHA Reduces MIP when Refinancing a HECM

Refinancing an existing HUD reverse mortgage, the Home Equity Conversion Mortgage (HECM), has become less expensive. In March 2005, the details were worked out and HUD’s Streamline Refinance was implemented. When a borrower applies to refinance their existing HECM, the FHA Initial Mortgage Insurance Premium (MIP) is reduced to the difference in the original Principal Limit (the previous HECM reverse mortgage) and the Current Principal Limit (the new HECM reverse mortgage)..

The lender needs to obtain the information on the original HECM to determine what the new reduced MIP will be. The borrowers are required to sign an Anti-Churning Disclosure that must be issued at the time of the Good Faith Estimate form per the Real Estate Settlement Procedures Act (RESPA)

In order to ensure that the HECM refinance will be of benefit to the borrower, the lender is required to provide the total cost of the refinancing and the best estimate of the funds available after the closing costs and other fees. In determining whether refinancing is viable for a borrower, the borrower should take into consideration the total costs of the reverse mortgage (all other costs are not reduced) and review whether they will be receiving enough proceeds to meet their needs.

Although HUD has stated it could be waived if certain criteria is met, the lenders generally still require the free third-party counseling for refinancing a reverse mortgage.

For further clarification and to determine whether refinancing an existing HECM reverse mortgage, contact Reverse Mortgages SIDAC.

Reverse Mortgages SIDAC
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Toll free: 1-877-590-9648

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