Reverse mortgages are loans that people age 62 or older can take out against their home’s equity. Backed by the Federal Housing Administration, the loan doesn’t have to be paid back until the borrower either moves out or dies.
New rules, which launched in October, discourage homeowners from taking lump sum payouts by reducing the payment a borrower receives if they take the entire amount immediately. Homeowners who choose the lump sum option could see their payouts reduced by 10% to 18%, depending on underwriting factors. So the payout on a$140,000 reverse mortgage would go down to $125,000 or so if the borrower chooses a lump sum.
Reverse mortgages are expensive. There’s a 2.5% origination fee on the first $200,000 borrowed for some loans, an upfront mortgage insurance fee of 2%, and a host of other fees that can push the extra costs to $15,000 or more for a $200,000 loan.
The new rules now require lenders to make sure borrowers have sufficient enough income from Social Security, pensions and other savings in order to afford both living expenses and these charges. If borrowers run a risk of defaulting, they are required to fund escrow accounts to cover the property taxes and other routine expenses on the home.
