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Gainesville Florida Estate Planning & Elder Law Blog

Wednesday, October 4, 2017

New Rules on Reverse Mortgage Borrowing

The federal government has issued new rules on reverse mortgages. These new rules went into effect this Monday, Oct. 2, 2017, and only impact new borrowing. If you already have a reverse mortgage, these new rules do not apply to you.

Reverse mortgages are a financial product available for homeowners 62 or older who have accumulated home equity and want to use this to supplement retirement income. Unlike traditional mortgages, there are no monthly mortgage payments to make. Borrowers are still responsible for paying taxes and insurance on the property and must continue to use the property as a primary residence for the life of the loan.

And while tempting, they do come with risks. The biggest of these is that when the homeowner passes away, the loan balance, interest and any accrued fees are taken from the sale of the home. But if there is a surviving spouse, they may lose the home. Or if the value of the home no longer covers the cost of the loan, your beneficiaries may be held responsible for the difference.

There are three main changes to the federal rules governing new home mortgages. The first is that the initial mortgage insurance premium for all borrowers will be 2%. Prior to the new rule, borrowers seeking less than 60% of home equity in the first year paid an initial premium of .5%, while those borrowing more than 60% paid 2.5%.

Second, the ongoing annual premium will drop from 1.25% to .5% of the outstanding mortgage balance. This impacts all new borrowers.

Finally, the amount that borrowers may access is still tied to age and ongoing interest rates. But the amount is likely to be less than it was previously under the same circumstances. Given current interest rates, most borrowers should be able to obtain about 58% of the value of the home. That’s down from the previous 64%.

Federal officials say these changes are needed to keep the program afloat.

As always, you should exercise caution when considering a reverse mortgage. These new changes make it even more important to consider whether this is the right alternative for you.


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