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The federal government continues to work out the kinks in its reverse mortgage program. The latest change allows a non-borrower to remain in her home after her spouse, who signed the reverse mortgage, has died.
The federal government established its reverse mortgage program in the 1990s to provide an alternative source of income for retirees over age 62. These Home Equity Conversion Mortgages (or HECMs ) are secured by the equity in borrowers’ houses, and the loans are repaid only when they move or die. The loans are federally insured to ensure that borrowers get all the funds they’re promised, even if the lender fails, and that lenders are repaid, even if the value of the property securing the loan declines.
A June 2015 regulation effectively allows lenders to permit a surviving, non-borrowing spouse to remain in the home, postponing loan repayment until she moves or dies. To qualify, the original reverse mortgage must have been approved by the Federal Housing Administration prior to August 4, 2014, and the property tax and insurance payments must be up to date and other conditions met.
The spousal provision adds to earlier changes, detailed in a 2014 report by the Center for Retirement Research, aimed at improving the HECM program’s fiscal viability while protecting borrowers and lenders. These regulations were a response to riskier homeowners who had tapped their home equity to cope with the Great Recession. The regulations reduced the amount of equity that borrowers could extract upfront and also introduced financial assessments of homeowners to ensure they’re able to pay their taxes and insurance.
Today, the maximum amount allowed for a reverse mortgage is calculated based on the value of the home (up to a $625,000 value) , current interest rates, and the borrower’s age. Homeowners generally are limited to borrowing just 60 percent of that personal maximum in the first year of the loan.
When the reverse mortgage closes, borrowers pay an insurance premium equal to 0.5 percent of their house’s value, which can be paid using funds from the loan. They also pay an annual insurance fee of 1.25 percent of the loan amount, in addition to the normal interest charges.
Despite the changes, few people have a reverse mortgage – just 52,757 were approved in 2014 . But as more baby boomers reach retirement with insufficient savings, more of them should consider a reverse mortgage as one option for supporting their retirement needs.
Click here for the Center’s booklet explaining how reverse mortgages can provide retirement income.