Tougher Reverse Mortgage Rules to Take Effect
Soon borrowers will have to pass a financial assessment before they can take out a reverse mortgage.
Read moreThe federal government has tightened the rules regarding reverse mortgages, making it harder for some seniors to get these types of mortgages and reducing the amount of their home’s value that they can tap. The new rules are an effort to strengthen the federal Home Equity Conversion Mortgage (HECM) program, which insures almost all reverse mortgages and which has seen default rates rise.
A reverse mortgage allows a homeowner who is at least 62 years old to use the equity in his or her home to obtain a loan that does not have to be repaid until the homeowner moves, sells, or dies. In a reverse mortgage, the homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. Seniors sometimes use the loans to pay for long-term care.
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The loans are expensive and controversial. In recent years there have been complaints over problems with reverse mortgages, including large costs, aggressive marketing techniques, and the danger of default if insurance and property taxes aren't paid on time. Encouraged by lenders, more homeowners withdrew the entire loan amount all at once, straining the HECM program’s reserve funds.
The government began addressing these problems last year by eliminating one of the most popular types of reverse mortgage, the HECM Standard fixed-rate, lump-sum reverse mortgage. The new rules make changes to who can take out loans, the amount they borrow, and the pricing, among other things:
"The changes really put the product on track as a long-term financial planning tool as opposed to a crisis management tool," Ramsey Alwin, senior director of economic security at the National Council on Aging, told The New York Times.
For more information about these rules, click here and here.
Soon borrowers will have to pass a financial assessment before they can take out a reverse mortgage.
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