New Federal Rules Make Reverse Mortgages Less Risky for Seniors

Although reverse mortgages have been around for nearly three decades, financial advisors have remained skeptical due to the risks associated with these unusual financial instruments, including losing your home to foreclosure. However, the Federal Housing Administration (FHA) has recently implemented new rules to reduce both the risk and the cost to borrowers.

Home Equity Conversion Mortgages (HECMs), as reverse mortgages are formally known, allow senior citizen homeowners to convert their home equity into cash. This is a useful tool to seniors as life expectancies increase and many find themselves without adequate retirement income. In the past, however, as many as 10 percent of reverse mortgage borrowers ended up in default, unable to keep up with rising property tax and homeowners insurance costs.

In an effort to quell these reverse mortgage delinquencies, the federal government took two steps. First, the FHA now requires a financial assessment process to ensure borrowers have enough money squirreled away – or available in liquid assets – to cover ongoing costs, like taxes an insurance, over the long-term. Second, the FHA put limitations on the amount of equity borrowers can cash in on up front – 60 percent of accrued equity – while also limiting the upfront costs of mortgage insurance. Borrowers can still choose between a lump sum or a line of credit, and the loan doesn’t become due until the owner or an heir sells the property.

Financial advisors are now rethinking the conventional wisdom of reverse mortgages, admitting that this financial tool can be beneficial for homeowners aged 62 or older. As with any mortgage, the experts caution that it’s important to shop around among lenders to secure the best loan terms for you.

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